How SMEs can win the war against late payments

Every January, many small businesses run into cash flow problems because they’re waiting on customer payments from the year before.

Along with bad debt and unexpected expenses, late payments can negatively impact the sustainability and profitability of SMEs. And the situation is worse than one might think.

Sage’s ‘Late Payments: The Domino Effect’ study found that, in South Africa, 15% of invoices are paid late, and more than 88% of payments due to SMEs are either never made or are made so late that they’re eventually written off.

The knock-on effects of this are far-reaching. Small businesses can’t pay their staff or suppliers and, to stay cash-flow positive, they’re forced to use money that they’ve put aside to grow their business to keep their doors open.

But there is one way that SMEs can guard against the effects of late payments, and that’s to maximise their cash flow by cutting unnecessary expenses.

Here are a few ideas:

Don’t depend on a single customer

Try not to rely on one source for the majority of your income, especially if the customer often pays late. Another risk of this approach is that you’ll take a massive financial knock when that customer no longer needs your services. A safer option is to draw your revenue from a handful of regular customers.

Don’t let admin fall by the wayside

Small businesses spend over two weeks following up on late payments, according to our research. Let smart software do the heavy lifting. Cloud-based accounting solutions, like Sage Business Cloud Accounting, automatically sends reminders to customers who are overdue on payments. It generates accurate invoices and reconciles with your bank account, giving you a real-time view into the state of your cash flow.

Tip: Be sure to send invoices to the right person or department, to avoid rejection and delays, and clearly define your payment terms, including penalties for late payments.

Make it easy to pay you

By offering a variety of payment options – like card facilities, direct bank deposits, mobile payment solutions, and app payments – you enable customers to pay on the spot, rather than relying on them to remember to pay you once they’re back at the office. This makes it easy to do business with you, which any customer will appreciate.

Tip: Consider offering discounts to customers who pay their accounts early, or in full, and be sure to check a customer’s credit history before offering payment terms.

Build a relationship with your bank

Set up a credit facility with your bank before you need it. This not only lets you build up a solid credit history and negotiate better interest rates but also gives you instant access to funds when you need them most.

Get inventory smart

Having too little stock means you could miss out on a sale. Having too much stock means you’re losing money – and tying up cash – through unnecessary expenses, like storage and insurance. Sage Inventory Advisor helps you forecast how much stock you need, quickly place orders, and ensures you never have too much or too little inventory on hand.

Get help

Our research found that 24% of SMEs don’t have a team member on staff who can focus on chasing late payments – and 13% of SME owners don’t have the time to do it themselves, either. Along with smart accounting software that can do this for you, having someone who can focus on collecting money can drastically improve your cash flow.

All SMEs should have a rainy-day fund to guard against slow months and late payments. Improving your cash flow can help you to meet your own payment commitments and avoid late payment penalties.

Money-saving tips

• Look out for cash savings, like discounts on bulk stock purchases or incentives for paying accounts on time.
• Tap into the gig economy, for immediate access to expert skills, when you need them, for less.
• Be frugal with office space, equipment, and staff – only buy or rent what you need.
• Negotiate with suppliers to arrange flexible payment terms.
• Barter – offer your skills or services in exchange for someone else’s.
• Get free money – investigate government loans and grants for SMEs.