Research by The FSB, http://ow.ly/okGe30omfUx , has reported that, “37% (of SME’s) have run into cash flow difficulties, 30% have been forced to use an overdraft and 20% cite a slowdown in profit growth. If all payments were made on time 50,000 more businesses could be kept open whilst the UK economy would receive a £2.5 billion boost.” Seven out of ten small business owners cite cash flow problems as the biggest threat to their company, with late payment being one of the most common causes.
So, what can be done to reduce the most common cause of cash flow issues, late payments?
Step 1. Assess your attitude to payment risk
Ask yourself, what is the level of risk you can take on payments. If the answer is ‘no risk at all’, then payment in advance is the solution. This can restrict your market somewhat, especially in the B2B world where companies often expect to pay on account. If you decide to give terms, then you need to protect your self-using these steps.
Step 2. Know who you are dealing with
Be selective about who you work for and credit-check new prospects before starting to do business with them. Turning down potential new contracts is not easy and needs a steely resolve, but if a company’s credit history looks less than impressive, you could be saving yourself future heartache and cash flow problems. Creditworthiness should be monitored throughout the relationship with a customer company, as a change may signal a payment issue looming, and you are best prepared when you are forewarned.
Step 3. Tie up the T&C’s
Establish the terms and conditions under which you will be paid. It is a lot easier to set expectations at the beginning of a relationship, and make sure that you do it in writing. Watertight terms and conditions establish the rights and responsibilities of both parties and can save a lot of time and money in the long run. You may find that a standard set of Ts & Cs covers everything you need to include, from payment and delivery terms, to what happens if you are not paid. Depending upon the nature of your business, it can often be a good investment to contact a solicitor to draw up a bespoke set.
Step 4. The human touch
Having entered into a contract, good communication and building a relationship with those involved in the payment chain is essential. People find it a lot harder to delay payment to those they have a relationship with. When you submit an invoice, ask if there is any reason why it will not be paid on time. People generally do not like to go back on their word.
Step 5. But what if they don’t pay?
If you follow the points above, issues with payments will start to reduce. But there are always a few customers who will present a problem. There are several solutions, and the one you choose will depend upon the T&C’s and the size of the debt. The key is not to shy away from the issue. As soon as they are late, contact them and find out why. Record everything in writing, be professional and seek advice. Don’t make hollow threats about going legal if you are not prepared to follow it through.
The key in all cases is to know who you are dealing with, agree how payments will be made, keep to those agreements, build relations, and if all else fails, seek advice early on.
If you need to reset how you collect cash, get in touch with me, for a no obligation discussion on credit control.
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