At any one time, UK companies are having to deal with around £44.6 billion in missing and late invoice payments. It helps to explain why cash flow problems cause around 90 percent of all business failures.
Late payment is a scourge which has become commonplace in today’s business community. A study in Zurich found that one-in-five companies are owed more than £25,000 in overdue payments, with 10 percent chasing in excess of £100,000.
And the smaller a business is, the worse these problems are likely to become. For the larger companies, the average payment times are around 48 days, while for an SME it’s around 72 days.
It’s a problem which acts as a major drain on company resources. It’s not just constantly having to chase late payments, it’s also having to juggle around various funds to cover for the missing amounts.
So what can you do to improve business cash flow? Here’s a look at some of the most effective strategies:
Faster invoicing, quicker payments
The longer you take to send out an invoice, the longer it typically takes to get paid. It’s why companies are increasingly moving to digital invoicing systems to handle the administration and improve business cash flow.
It removes the lag that’s caused by traditional invoicing setups which rely on backroom staff having to manually process paperwork, collate information and send out invoices. With a digital system, all of this is automated.
It means that invoices can be ready within seconds of a job being finished. It also means that automated reminders can be sent out when payments are overdue. It’s an efficient method which significantly reduces the risks posed by late payment.
Build better customer/client relations
While digital systems provide an effective tool, you shouldn’t underestimate the power of human interaction. The easiest invoices to ignore are those ones that appear ‘faceless’ to a finance team - not associated to any particular person.
By establishing a professional rapport with a client, it creates a human consequence to late payment and a potentially awkward interaction which most account handlers would rather avoid. It’s a tricky area to get right and requires finding the right balance between a professional and friendly approach.
Better relations with clients and customers also provides a better way to gauge whether reasons given for late payment are legitimate or stalling excuses.
Remove any ‘wiggle room’
Any kind of missing or incomplete information on an invoice provides a client with an excuse for late payment. An effective invoice should, therefore, include all of the detailed and accurate information that’s required to remove any potential holdups.
With digital management systems, companies can now track and store precise information on every aspect of work carried out, providing times and locations for services and a breakdown of items used. It provides everything that’s required for a quality invoice.
The invoice should also clearly state the payment terms and outline the potential consequences of failing to provide payment within the agreed timeframe.
Establish payment terms early
Payment terms are something that need to be made clear from the very outset. If a company or client doesn’t agree to them, it’s best to resolve these differences before any goods or services have been provided.
The end user needs to understand the forms of accepted payment, the timeframe within which it should be paid and, if you choose to use them, any late-payment penalties. By establishing these clearly, it avoids confusion and will strengthen your hand should late payment become an issue.
Don’t be afraid to enforce terms
If late payment terms have been clearly outlined and accepted, you shouldn’t be afraid to enforce them. While there’s often a reluctance to use the ‘stick’ approach, it’s no different to a bank charging for an overdraft.
If late-payment terms are set at a reasonable rate, they act as an incentive for the client to pay the outstanding invoice. If you don’t intend to enforce them, it’s better not to set any in the first place.
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