One of the biggest issues for the finance department is getting its invoices paid on time. Last year, the government estimated that there were £23.4 billion worth of late invoices owed to British businesses.
Late payment impacts cash flow, holds back investment, damages business relationships and threatens a company’s survival. There are three main reasons why businesses don’t pay on time and if you deal with them effectively, you can minimise the damage that late payment causes.
Why Clients Don’t Pay on Time
Assuming there is no dispute over your bill, and your client is just late in paying, here are the three main reasons that could lay behind their actions.
1. Insufficient Funds
Sometimes your client just doesn’t have the money to pay you. While that’s not your fault, it is your problem.
It might be a temporary cash flow problem. In this case, you can hold out and hope that they will be able to pay you soon. Alternatively, it might be more serious than that. They may have serious financial problems and regardless of how long you wait, the issue may only get worse.
2. Wanting to Maintain Control of Cash Flow
Some companies delay invoice payments because they want to keep money in their bank accounts for longer. Preserving their cash flow and treating your business like a free credit provider is their aim here.
Although they will earn only very little interest on their funds, delaying payment for as long as possible provides an additional cash flow benefit. This type of late payment can harm a company’s reputation and make suppliers unwilling to work with them.
3. Admin Failures
Your customer may genuinely have not received your invoice, failed to log it, forgotten about it or somehow lost it in their system.
There is a very real chance that the odd emailed invoice may not be properly delivered. You may even be using the wrong contact details or email address.
Other problems from your side can include not including the purchase order number or failing to include the right order details, pricing or VAT details.
How to Avoid Late Payment
Taking the legal approach is one way that you can attempt to reclaim any money you are owed. This is expensive and time-consuming though, and suing a customer is really a last resort for most businesses.
Instead, there are other ways that can be tried before this.
Firstly, make sure that you always have the basics sorted. Make your payment terms clear upfront, invoice in a timely manner, include all the right information and correct pricing to avoid the invoice being rejected, send it to the correct contact, and offer clear directions on how to receive payment.
If you know your customer is struggling to pay, you can offer a payment plan that spreads payment over time. With some customers, this may be the best way of getting the money you are owed. If they are having more serious problems with liquidity and paying their debts, then it may be the best strategy to be at the front of the queue for payment, or at least get some of the money you are owed.
For customers that are always forgetful or poor at handling admin, you can consider asking them to set up standing orders or direct debits. This is a good practice for recurring invoices and their payments will always be made on time and you can be sure of receiving them.
It’s good admin practice to regularly and frequently remind customers about outstanding invoices anyway. Issuing overdue invoice notifications and calling clients to chase for payment is an essential part of the accounts receivable role.
For those that are slow payers, where you don’t believe they will default, consider offering a discount for faster payment. For example, you could offer a 1% prompt payment discount off the invoice total if paid within 10 days. Even though the full amount is still payable within 30 days, the discount may encourage some clients to pay you sooner. You need to finely balance the payoffs here and judge whether it’s better for you to be paid in full or paid less but on time.
Under late payment legislation, you can claim interest and debt recovery costs for invoices that are paid late. Once an invoice becomes late, you can reissue it with the interest and fixed charges.
The UK also has a Prompt Payment Code that aims to ensure that larger companies pay on time. It is voluntary, but those companies that sign up to it pledge to pay their suppliers within 30 days. It’s aimed at helping small businesses, which account for around two-thirds of employment in the private sector. According to the Federation of Small Businesses (FSB), some 50,000 companies are forced to close each year because of late payments. While not all your customers will be signatories to the code, supplying those that are can give you some protection.
If you’re a service provider, then another way of ensuring payment is to withhold any deliverables until you’ve been paid. That might be too late for any current overdue invoices, but it’s certainly something to consider for future projects. Alternatively, you could establish a series of payment milestones, so that a proportion of the final fee is made up front, and then regular percentage payments are made in stages as the project continues.
Using technology can help too. Automation can improve your own processes so that the issues of late payments are minimised. While it can’t ensure your customers actually have the means to pay, it can smooth some of the admin processes and streamline workflows. Using an ERP, for example, will ensure that your invoices are sent out on time, are accurate, formatted properly, and are sent to the right people.
By combining information from a central database with automated accounts payable functionality, there is no need for staff to duplicate data entry, so errors are reduced. With more accurate data and streamlined workflows, your admin is improved and your debtor days are reduced.