Late payment is the most common cause of cash flow crises. If one big company falls behind on paying its suppliers, the devastating effect can ripple down the supply chain and put companies out of business. Here are some pointers to dealing with the issue and saving your cash flow.
Get to know your customer – Knowing your customer is critical when it comes to credit management. Check the exact name and legal status of each of your customers and credit check new customers where you can. However, do not simply rely on credit ratings, ask for references from other suppliers and make your own assessments on the customer’s propensity to pay.
Set out payment terms – Once you decide to take on a new customer, define your credit policy. Agree payment terms at the order stage and make them very clear. Do not assume that you will be paid on 30 days or end of month following, instead set out payment terms in writing and try to obtain written acceptance, ensuring your customer’s order does not suggest different payment terms.
Encourage timely payment – Printing the payment terms on easy-to-understand invoices that go out on time can also help prompt debtors to pay, as will clearly setting out the penalties if a payment is late. Another way of encouraging your customers to pay quickly and on time is by offering discounts for prompt payment.
Get your invoices right – A disputed invoice will not be paid so do not give the customer any excuse to contest their invoice. This requires being on the ball in terms of accuracy such as clearly specifying the goods or services being paid for and being sure to quote the customer order number.
Manage your debtors – Once an invoice has been issued, make sure to keep an eye on your debtors. For large or important amounts, telephone before the due date to make sure the payment is still on track. If a payment hasn’t arrived, don’t be afraid to ask for it and outline to them the consequences of non-payment. Some basic financial management software can go a long way towards helping you manage your debtors as you can not only use it as a central resource to create and send invoices from but also list and track the invoices that are overdue and monitor your performance in getting paid.
Cover yourself against bad debts –Trade credit insurance covers against the risk of non-payment due to your customers’ insolvency so can be invaluable in protecting your business. This year the Government extended its credit insurance scheme to enterprises that have seen their insurance pulled since October last year. For more information, visit www.businesslink.gov.uk.
Chasing payment – If contacting the debtor to try and resolve the issue has not worked then there are various ways you can retrieve payment. Firstly, consider exercising your legal rights under late payment legislation to charge penalty interest or add debt recovery costs. If that doesn’t prompt the debtor to pay, then you can hire a specialist debt collector to help you. They have the expertise and time to focus on retrieving the debt. If all else fails, then you can always consider taking court action but this should be seen as the last resort as it can cost you time and money.
See also: How to deal with late payment
Advice from John Judge, managing director, Judge 3D
If payment is late, pick up the phone and have an informal conversation with the client to seek to understand why it is late. There may be a very simple reason. If you’re not satisfied with the explanation, request a face-to-face meeting to solve the issue.
The most common excuse I hear for late payment is that there’s a problem with the paperwork. I find out who is responsible for payment in the organisation and re-post them a copy of the invoice and this time email it as well, asking for confirmation of its arrival.
If the invoice is due in 30 days, I wait 20-25 days and liaise with the contact and politely find out if everything is okay with the payment and that it is still due to go through on time.
In this situation you have to be proactive, not aggressive, and you have to be open and honest, and keep a record of everything. If the situation develops you have to decide whether to forego the payment or escalate your case to county court.’