According to research by Tungsten, the average SME is owed £40,857 in unpaid invoices, with £20,937 of that total amount being overdue. An amount which, according to the 1000 companies surveyed, places 1 in 5 of those businesses at risk of insolvency.
Even if it doesn’t put your business at risk of insolvency it certainly has an impact on your cash flow. A recent article in the Telegraph summed this up well, saying that ‘Late Payment doesn’t just affect cash flow, it affects a small firm’s appetite for investment and growth’
Not only does this have a detrimental effect on finances, but it also wastes time, as the average small business spends 130 hours per year chasing invoices.
So what can you do to minimise the risk in your small business? The answer is you need to get an effective credit control procedure in place.
Here are our tips for keeping on top of credit control and cash flow in your business.
- Do what you can do to avoid giving credit wherever possible. If it’s possible for you to charge up front, or at least get a deposit then do so. If you never give someone credit they are not going to pay you late.
- Invoice promptly. Send invoices straight away as any delay there is likely to cause a delay in payment.
- Clearly state your terms and conditions on the invoice.
- Also on the invoice clearly state your bank details and how you want the client to pay.
- Make it as easy as possible for your client to pay. Automating the process by setting up a direct debit can be very simple for both the client and you as a business owner. We use GoCardless to collect direct debit payments and we have found the service to be invaluable in terms of saving time spent chasing invoices for a nominal fee. You will also be alerted if any of your clients cancel their direct debit arrangement which can alert you to any potential problems early on in the process.
- Ensure that someone, either a person within your organisation, or an outsourced service partner has responsibility for credit control. This incumbent should not only have dedicated time set aside each week to devote to your credit control, but they should also understand the importance of this role to your business.
- Don’t automatically assume that you are the best person to take on the task of credit control for your business. Often there are advantages to delegating or outsourcing credit control to either a credit control agency or a Virtual Assistant, which can include:
- freeing up your time to concentrate on more profit making activities
- separating you from the process of chasing the client can be good as business owners can often feel embarrassed or awkward about chasing money (although you shouldn’t).
- It makes sure that it does get done every week, as as the business owner you may find yourself pulled in other directions.
- Be systematic. It’s important that you have a clear credit control procedure in place that you follow to the letter. Following a system, and keeping a record of this has a number of benefits:
- You know exactly where you are in the process at any one time.
- The process usually works, preventing invoices becoming overdue is always the best way.
- In the worst case scenario, should you need to take this to a debt recovery company or take legal action you have shown that you have followed a legitimate process.
A procedure for a business with 30 day payment terms would be something like this:
- Day 1 send your invoice
- Day 14 make a courtesy call to check that invoice has been received and to confirm when payment is due.
- Day 28 make another call to remind your client when the invoice is due.
- Day 37 send a first gentle reminder that the invoice is overdue.
- Day 44 send a stronger reminder asking for the invoice to be paid within a particular time frame to avoid further costs being incurred.
- Day 51 send a final reminder letter giving 7 days to pay before legal action is taken.
We use Kashflow for our accounting software and this has sample letters within it which can be sent at the click of a button and also recording everything that has been sent.
- Throughout the process it’s important to maintain good relationships with your client. Not only will they be more inclined to pay promptly or even early in some cases if there is a good relationship, but it’s also important for future sales with this client, or anyone else they may recommend you to.
- Regularly review payment ledger. Make sure if someone has paid that you are not continuing to chase them in the interests of maintaining a strong relationship.
- Make sure your business maintains a good reputation for paying suppliers promptly, not only does this give you the higher moral standing, but word gets around in the small business community and you don’t want to be known as someone who is a late payer as this weakens your position when chasing late payments from others.
If you’re not already following the above steps if you do introduce them will have a dramatic improvement on the cash flow and financial health of your business, but should you have done all of the above and you are still owed money don’t hesitate to take legal action.
If you’ve found this article interesting please feel free to share with anyone else you think would benefit.