Did you know 11% of all invoices issued by small and medium-sized enterprises (SMEs) are paid late?
Sage recently commissioned a study looking at the impact on SMEs when invoices are paid late. More than 3,000 companies across 11 countries were analysed in the effort to understand the scale of the problem, the ways it affects companies and where there may be remedies to the issue.
So what can your business to do to stem the flow of debt and open the ways to stability? As a Sage Global Business Influencer, I’ve joined some of my counterparts to share some advice on how you can get paid on time. Try these tactics and see how you get on.
What is the biggest mistake businesses make when invoicing and how can it be corrected?
Neil Cattermull @NeilCattermull: “Cash flow is king when you have a start-up business so invoicing and payment terms are key to its survival. One of the biggest mistakes you can make when invoicing is not arranging and agreeing appropriate payment terms.
“When onboarding a new client, it’s imperative you have payment terms understood and agreed.”
Stella Holman @Stella_Holman: “In my business, I do not issue monthly invoices. I have a retainer or agree a set price for the project and the customer pays it all in one go with perhaps a discount if it is paid early or they may enter into an agreement with my business to pay in instalments.
“I make sure that the price is based on the exchange rate for that date when dealing with people in other countries and make a point of writing this in the initial agreement. Price is fixed on the rate agreed at the time of signing the contract. It’s important to add any charges that occur when accepting payments from other countries.”
“Invoicing is just another part of the business relationship, however it’s not uncommon for sales teams to treat it as an admin afterthought that gets thrown over the fence to the finance team to deal with.
“Invoicing should be discussed at the start of the relationship; ensure the payment schedule is detailed in the contract or proposal – include amounts, timing, frequency, items being billed for and unit prices as well as who should receive the invoices.
“As with most things in business (and life), a mantra of ‘no surprises’ is key.”
What is the best process to follow to be paid on time?
Neil Cattermull @NeilCattermull: “I don’t think there is one best process to follow to be paid on time. When you are in start-up mode, you need to be paid quickly and on time, even early if need be.
“It’s not uncommon to apply discounts to client agreements if multi-year contracts are applied and payment runs agreed. This is a process I commonly used when starting out and works well if executed properly.”
“If sharing documents online, make sure there is an alternative method if access to the server is blocked in any way. For example, when travelling it is not always possible to access certain social media sites and services.”
Steven John @SJTechGuy: “If all your invoices are issued in strict alignment with expectations with a due date clearly marked, then the majority of hurdles to prompt payment are taken away. Even something as simple as changing the narrative on an invoice can see this put in the “to be reviewed later” pile rather than passed through the chain for payment.”
If customers pay late, what can you do?
Neil Cattermull @NeilCattermull: “When running a small business, late payments can literally sink a company. If a client consistently pays late it could be down to payment runs that said client has. Putting your invoicing timeline in line with their payment runs will help but if this isn’t the issue then payment plans need to be enforced.
Stella Holman @Stella_Holman: “Additionally, you can offer incentives to pay earlier but it will be more likely that they have cash flow issues themselves and a bigger problem may be a foot.
“If all else fails, you can consider factoring of invoices but this will cost you to put in place but at least you will be safe with the knowledge that you get paid first by the factoring company (minus their charge) and your client will be chased by them and not you.
“In the end this might be a more attractive option rather than offering discounts and payment plans. If the payments are late and the client is a friend, I would ask to speak with them and confront them about the situation and offer a solution to help them pay.”
Steven John @SJTechGuy: “The first thing: don’t immediately assume there’s an underlying issue. Relationships can quickly be destroyed by knee-jerk responses that include legal demands, threats to withhold services or applying penalties.
“The first action should always be to get on the phone and find out what’s happened. It can often be something as simple as someone being on an extended period of leave or emails being trapped by an overzealous spam filters.
“The vast majority of businesses aim to pay on time so start from that mindset. Of course, sometimes customers may need to be cut a bit of slack, particularly small businesses who may be reliant on incoming funds from larger organisations to settle their own bills.
“So make sure you understand the situation before reacting. Don’t forget, one day your business might itself in the same position. What goes around comes around…”
I’m friends with my customers and worried about chasing them for fear of losing them. What can I do?
Neil Cattermull @NeilCattermull: “Well there’s an old saying: ‘There’s no friends in business.’ And if they were friends before becoming a client then they will understand that it’s a business decision not personal when asking for payment.
“Have a frank discussion with them and if this is an issue, you can always remind them that you both have businesses to run. In this case, a third-party debt collection agency could be considered for intervention. Your customer probably has been in your situation too and should respect this decision.”
Steven John @SJTechGuy: “If you fear that pointing out they’re being tardy with their payments will jeopardise the relationship then my first question is are they really your friend?
“A sensible conversation explaining why prompter payments are required should be sufficient. If necessary, you could explain the problems it is causing your business but that really shouldn’t be necessary if it’s a real friendship.
“What might be easier is to remove yourself from the business element of that relationship. Try to find someone else – bookkeeper, assistant, partner – who can liaise with your friend about payments and invoices so you can draw a line between your personal relationship and your business interactions.”
Final thoughts on getting paid
Did you know 7.5% of invoices are eventually written off as bad debt? This will certainly have an even more significant impact on operations. The proportional impact of late payments varies by country but in all cases, there is a significant issue.
There are many reasons why you and your fellow SMEs are considered the backbone of economies. Your businesses typically account for the majority or close to majority of gross value added (GVA) and employment, pay a substantial share of corporation taxes and are key drivers of growth, innovation and diversity.
Your contribution is particularly noteworthy given the obstacles you face, including late payments.
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