7 ways to prevent late payment

Keep the cash flowing in your direction with these top tips

Did you know that 43 per cent of UK small businesses are getting paid up to two months late, with an average overdue debt of £17,000? Or the cost of recovering overdue money is, on average, £9,000 for each business?

Healthy cash flow is essential to operate and survive. Of all the things that cause small businesses to fail, a staggering 82 per cent die due to cash flow problems.

Here are seven things you can do to reduce the risk of late payment and bad debt and make sure that the cash flow is moving in your direction:

1. Know your customer

You need to be confident both new and existing customers will be able to pay their invoices. You can get information about their financial circumstances from a credit reference data provider. It’s important to continue to watch the payment history of existing customers too, as their circumstances can change at any time. We often call this due diligence. All that glitters is not necessarily gold.

2. Have clear terms and conditions

Your franchisor has probably provided you with a standard set of these. If it has, make sure you use them with every customer. If it hasn’t, consider getting some professionally written.

Your terms and conditions enable you to be specific with your clients about what you expect from them and, conversely, what they can expect from you. They eliminate the potential for misunderstanding and remove any ambiguity.

You may feel when starting out that the extra cost to get terms and conditions drafted is unnecessary. However, skipping this will be a false economy. If things go wrong with a client relationship, hiring solicitors to unravel what was agreed can be expensive.

It’s not enough to simply present your customer with your terms and conditions. They need to agree to them and you need to be able to evidence that agreement, which should happen before you transact any business.

3. Collect and safely store additional customer information

At the start of any new customer relationship, it’s important you have all the relevant information you need to be able to get paid promptly.

You’ll probably already have your buyer’s contact details, but what about the accounts payable department? What days do they work? Not everyone works full-time.

Do you know when the customer does their payment runs? Every day? Every Friday? Only at month end? This information is vital to help you plan any credit control activity.

Does the customer require purchase order numbers? One of the biggest causes of delay is missing PO numbers. In some cases, finance departments won’t make a payment without one.

Use a standard customer information form to gather all this data, which will act as a checklist to make sure you don’t miss anything. Keep it up to date, as people move on and processes change.

4. Be prompt and accurate with your invoicing

Where possible, take some or all payment upfront and don’t start work or deliver the goods until that first invoice has been paid. Otherwise, as soon as work is complete or goods delivered issue your invoice.

If the work is going to take a significant amount of time to complete, consider interim invoices at key milestones in the project.

Make sure your invoice details all the products and/or services provided and contains all the information needed to enable the customer to pay it promptly. Any error or omission can lead to disputes, which delay payment.

Put the due date on your invoice. This is not a legal requirement and many accounting and invoicing software solutions do this automatically. It does, however, make a world of difference and prevents misinterpretation of the payment terms.

5. Be fast and efficient when dealing with disputes and queries

Queries and disputes can be genuine, yet they can also be delaying tactics. Assign them to someone with the responsibility to respond to the customer directly. It’s good practice to have a documented dispute resolution process, which includes responsibilities and timeframes.

6. Have a clear process to follow for chasing payments

Make sure no invoice gets overlooked by having a documented process that outlines the:

• Timing.
• Frequency.
• Number of contacts: the amount of calls, letters, SMS or emails required to chase for payment.

Make calling your primary method of chasing. Every opportunity to talk to a customer is an opportunity to build the relationship, even when asking for payment - if it’s done mindfully. A good relationship means you’re more likely to jump to the top of the invoice pile.

If you have a high volume of low value invoices, save yourself time and money by having standard correspondence templates for chasing debt. Such consistency in your processes will make sure you treat all your customers with fairness and equality.

7. Have the right data at the right time

You need to know if everything you are doing is making a difference. You also need to work out what improvements you can make.

Having good reporting systems lets you compare month on month your progress for key performance indicators such as aged debt, invoices paid to terms and volume of invoices in dispute.

You’ll never eliminate late payments and bad debts altogether. But you can reduce both them, and the negative effect on your cash flow, by being better informed, better prepared and better organised.

The author

Nicki Kinton is the founder of Confident Cashflow and an accredited member of the Chartered Institute of Credit Management.