If you’ve always been employed by someone else, managing your own business finances will be an interesting new experience for you!
If there’s one universal reason why so many businesses fail, it’s because of a poor or non-existent cash flow. In fact, every year, in excess of 10,000 businesses fail each year because of this.
Once you start experiencing cash flow problems, you can quickly fall into a rapid, downward spiral. You can’t buy the raw materials you need for your end product, you can’t purchase the equipment you need to deliver your particular service and, if you have staff, you won’t be able to pay them.
One way to avoid this common pitfall is to ensure that you are never reliant on one single customer for a large proportion of revenue. Another is to make sure that above everything, you pay your bills on time, buying goodwill with suppliers.
But if your customers aren’t paying you, it doesn’t really matter how diligent you are with your own finances. That’s why the Government introduced the Late Payment of Commercial Debts (Interest) Act in 1998, giving businesses with fewer than 50 employees the right to charge interest for the late payment of debts. This applies when seeking debt payment from small or large customers.
This is one good reason why you should clearly state your payment terms at the bottom of every invoice, contract and order confirmation. Better still quote the late payment act at the bottom of any financial paperwork.
State clear payment terms (normally 30 days, but depending on the nature of your business, it could be shorter or longer). Seek advice from your accountant on what’s normal for your industry.
One way you could avoid this difficult area altogether is by giving clients an incentive to pay earlier than your deadline by offering an early payment discount, or where relevant, suggest a discount if they pay several instalments at once or pre-pay.
When someone is late paying you, follow it up immediately. It’s not a bad idea to have an established point of contact in each client’s accounts department, should one exist.
Politely but firmly ask for the payment to be made and point out that if the problem persists, you will consider charging interest on the overdue amount. Failing this, say you will then have to discuss the matter with a debt recovery firm.
One way of tackling invoice payment problems before they have even arisen is by using a system called invoice financing, also known as factoring. This is an agreement between you and an invoice finance provider, whereby you receive initial payment (typically 80%) within a day or so of issuing an invoice.
You receive the remainder once the customer has paid the invoice, which they do to the invoice finance provider, rather than to you. Obviously, there is a fee for such a service, but if you think you will struggle with slow paying customers, it’s worth considering.
For dozens of dedicated guides to credit control, visit our cashflow section.