7 ways to neutralize the crippling effects of late payments on your business

A key knock-on effect of the global financial crisis has been the trend towards late payment of invoices among firms of all sizes, in all countries. Late payment is at best irritating and at worst crippling, especially for smaller businesses. Occasionally accidental, sometimes unavoidable, yet all-too-often deliberate and planned, the effects ripple through every economy.

Both caused a stir in 2010 when they announced unilateral extensions of payment terms to their suppliers, the former adding 15 days to its invoice payment times and the latter stating that ‘payment in 90 days’ is now standard policy.

In Europe, research from ByteStart suggests that late payments account for over £18.6 billion in outstanding debt in the UK SME sector alone, and that the average amount owing is a staggering £30,000.  Further, 25% of businesses going bust do so because of late payments, resulting in 45,000 lost jobs.

While it seems not much can be done to force the dominant clients to pay on time, smaller and mid-size businesses with a more diverse customer base do have other options.

In the USA, Mark Levine, CEO of United Companies Inc. - a Houston-based handler of plastic resin with 350 employees and $40 million in revenues - took things into his own hands and began personally calling the customers whose payments were past due. The trigger was seeing the proportion of clients with overdue payments rise beyond 50%.

Not all businesses can take that kind of approach. So our advice is to tackle the causes of bad debt ahead of time rather than having to chase or clear up the mess afterwards.

Here’s our list of 7 key steps you can take to make sure your customers pay on time, every time.

The theme is simple: prevention is better than remedy.

1. Set your payment terms. It’s up to you to decide when you want to get paid. Whether you ask for cash up front or choose to offer 90 days credit may be influenced by the competitive dynamics of your market sector, but ultimately you set the rules.   Once you’ve set your payment terms, make sure your customers know about them before you do business and ensure they appear as standard on every invoice and statement.
2. Embed credit control in your business. Asking for payment is not something to be embarrassed about.  Make sure your accounting team runs a tight credit control process.  Consider employing someone to ensure that you collect your cash promptly and regularly.  Empower them with document management solutions such as Zetadocs for Microsoft Dynamics NAV that make it easy to get your invoices out.
3. Automate your cash collection. Use your accounting software to set up automatic invoicing once delivery is complete. A document management add-on for your accounting system like Zetadocs for NAV can automate the sending of invoices and statements by fax or email at regular intervals or on demand.
4. Credit check new customers.  If you offer credit terms, research your customer’s past credit history to help you decide on the terms you offer.  A credit check can only act as a guide and should never be seen as a guarantee - but it can inform your decisions.   Even then, companies with the best credit rating may not pay you on time, as many small businesses have found out to their cost. Government organisations and many large corporates are among the worst culprits.
5. Make sure your customers know the score.  Make getting paid part of your conversation, and don’t be afraid to offer a reminder up front. When they buy from you, your customers should know when, how and where to pay.   If you know your invoicing cycle, tell your customer when they should expect an invoice. Put in a quick call once you know the invoice has gone, and check that they’ve received it.   If need be, remind them of the payment deadline and ask if they’ve got all the details they need.  You’ll stand a better chance of getting paid and your customer will see it as good customer service.  Even then, companies with the best credit rating may not pay you on time, as many small businesses have found out to their cost. Government organisations and many large corporates are among the worst culprits.
6. Take persistent action.  Many companies offer discounts for faster (or at least ‘on time’) payment – preferring the carrot over the stick.  But if the payment deadline passes again and again, don’t make the mistake of shying away from issuing a payment demand for fear of upsetting or losing the customer. It’s just good business!  Above all, follow through on everything you say you will do or your customer will see you as a soft option. If cash flow is becoming a problem for them, you need to make sure your invoice is on top of the pile.
7. Keep records. However you chase payment, it’s vital to keep an audit trail of your invoicing activity. If you use a system like Zetadocs for NAV to automate the sending of invoices and statements, your documents will be archived for quick and easy retrieval at a future date.  If not, use your CRM system, other database or just a paper filing system to maintain records of what you have sent, to whom, when and where – and include records of phone calls too.   If the worst comes to the worst and you have to retain a debt collection company or legal team, they’ll need full access.