Late payments causing grief? Here’s how to turn things around
Dealing with late payments can be infuriating for small business owners. Here’s how to take back your power, writes Nina Hendy.
Cash is oxygen to your business. But relying on others to pay invoices to your business on time can be a frustrating process for small businesses.
When you look at standard payment times on invoices, you might think that 30 days or less is the usual payment terms.
But extended and late payments impact all businesses at one time or another, which means predicting when a business will get paid is very difficult.
According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) inquiry into payment times, 96 per cent of businesses have 30 days or less as their standard payment time.
Despite this, around half of respondents reported greater than 40 per cent of their invoices were paid late last financial year. One in five businesses report an average payment delay of more than 60 days.
Of particular concern, 28 per cent of respondents reported over 60 per cent of their invoices were paid late last financial year.
The inquiry also found that 55 per cent of businesses expect their standard payment times to begin from the date of the invoice. However, only 7 per cent expect the standard payment times to begin from the date the invoice is received or entered in the purchaser’s system.
This suggests a disconnect between supplier and purchaser expectations.
Larger firms continue to be the worst for settling their debts, which can be a huge problem for small businesses, according to illion’s Trade Late Payments Report.
illion chief executive Simon Bligh said large businesses continue to be slower payers than SMEs, but the gap was narrowing.
“Our findings show that larger businesses typically settle their debts much later than smaller businesses. However, they are improving, with better transaction technology playing a part in lowering late payments,” said Bligh.
Here’s some tips for reducing payment terms with your debtors:
1. Devil in the detail
So many payment hold ups can be the result of your own mistakes. Make sure you sent the invoice, that your payment terms are clear and that you’ve included all the detail you need, including your ABN, payment total and a purchase order if required by the customer.
2. Formalise agreements
It’s exciting to land a new client, but make sure you formalise the arrangement. A contract creates a clear record to your terms of payment and what happens if the client pays late. Make sure you have these documents checked by a lawyer.
3. Set up automatic reminders
A solid online accounting platform like MYOB offer automatic reminders, which you can set within your system if you wish. This is a great way to automatic the chasing process and free up time for you to get back to doing what you do best – running your business.
Invoice reminders allow you to choose when you want your customers to receive reminders on individual invoices. Unpaid invoice summaries also contain a list of outstanding invoices that a customer will automatically be sent monthly.
4. Don’t be too patient
The ASBFEO inquiry found that the likelihood of recovering what you’re owed reduces the longer you delay, so make sure you follow up with reminders the moment that invoices fall overdue.
5. Establish a system
You’re going to have a much better chance of recovering late payments if the process is systemised within your business. Decide on your process and what’s acceptable, and establish systems that staff can follow to chase payments regularly and efficiently.
6. Invoice quickly
So many small businesses wait until the end of a month to send out invoices altogether. But sending an invoice as soon as you can will ensure your invoice is processed quicker by the receiver, reducing payment wait times.
If an account still hasn’t been paid within your agreed payment terms, make sure you follow up in a consistent way. Sending the client an email ‘just to check’ they received your invoice and that it’s been processed is a great first step.
8. Do your homework
Do some basic checks before commencing work. A reference or credit check (which may need written consent from the client) or even a Google search could reveal information that suggests you should steer clear of the them.
9. Write off bad debts
It might not be worth continually pursuing an outstanding amount, so decide whether you’re better off handing the debt over to a collection agency, or writing the debt off. It’s worth discussing this with your accountant first.
Acquiring and implementing a best-of-breed online accounting system in your business is the simplest way to begin increasing your cash flow. Start your FREE 30-day trial of MYOB Essentials and see how quickly your invoices get paid.