Every year according to statistics, late payments kill 50 000 SMEs. On average small businesses are owed £8,500 for goods and services provided to other firms and they spend up to two hours per day chasing those invoices.
With cash flow being more important than ever now is a crucial time for small businesses to address late payments.
In this article, London accountants BrooksCity offer some guidance for SMES to tackle the late payments problem without alienating clients.
Use accounting software
Having the best accounting software for your firm can make a world of a difference when it comes to both chasing late payments and staying on top of your finances. Besides being able to able to access your financial information at any time and from anywhere, accounting software can really streamline your invoicing process.
Nowadays most accounting packages make it very easy to accept credit cards giving your customers an easy way to make payments. In addition, you can set up automatic reminders at different time intervals to nudge them in covering your invoice, hence saving you valuable admin time.
The majority of platforms also have multiple reporting options available. The two most important ones when it comes to late payments are the average time it takes to get paid and your outstanding receivables.
Using this information, you will be able to understand how much is owed to you at any time and in how long you can expect to be paid. This can be used as a benchmark going forward while you work on improving your process.
Set up automatic billing
One of the simplest ways to get paid on time which is also becoming more and more common practice amongst service firms is automatic recurring billing. Inspired by SaSS businesses who charge a recurring subscription fee this models works just as well for other firms too.
Even if you work on a project basis, you could split it equally over the length of the contract and then bill separately for any extras. The same could said if you sold merchandise and your customers make similar purchases over the course of the year. You could calculate the average order as well as the frequency of their purchase and average it out to offer them a similar order at set interval times.
Recurring or subscription type billing can streamline the process for both your business but also your customers. If you do that, while keeping the customer experience in mind you may very well even get extra business out of it.
Charge late fees
The way you agree on the deliverables of a project and what happens in case you fail to meet your customer’s requirements, the same way you should discuss payment terms right from the start. As a small business cash is always king, your cash flow is the lifeblood of your business so you should keep a close eye on it.
If you work with other small businesses then they should know that, so if they respect you and your services they will understand your need to charge late fees, and hopefully you won’t even have to. If they are a bigger firm, you can explain to them the importance of cash flow.
Even when it comes to bigger firms, a lot of them have begun to take late payments seriously and even go as far as voluntarily signing the Prompt Payment Code.
Having a late fee policy will position you as a serious professional who has a business to run and it’s going to discourage repeat behaviour for late payers. If they are doing it to you, chances are they are doing it with others.
The important part is clear communication between you and your clients. Sometimes being more forgiving is a wise choice, especially if a longstanding client is facing personal or financial difficulties at the time. Make sure to speak with them first, both at the beginning of the relationship to avoid confusion but also if late payments are a new problem from an old client.