Late payments, overdue invoices and unpaid invoices cause major headaches for many small business owners. We look at how you can best deal with those unpaid invoices and slow-to-pay clients.
How do late payments affect your business?
It’s a harsh reality that small businesses are typically at the bottom of the payment pile, and that this can have a big impact on your bottom line. If you’re a small business and the major multinational you contract to fails to pay you on time, this will reduce your ability to pay your own staff, maintain your equipment, and grow your business. How then do you maintain enough cash flow to stay afloat? Let’s look at some ways to deal with late payments.
Crunching the numbers
A 2015 study by Market Invoice analysed 30,000 invoices from 80 countries. Australian companies were rated the worst in the world out of 19 countries surveyed! Australian businesses were being paid 26.4 days late on average. Given the standard 30-day payment terms, this means that many businesses are waiting up to two months for payment.
This is a huge problem. According to the Australian Small Business and Family Enterprise Ombudsmen (ASBFEO), a lack of cash flow is the reason a whopping 90 per cent of small businesses fail. The ASBFEO also reports that Australian small businesses are owed $26 million in unpaid invoices. Business owners spend an average of 12 days a year chasing these late payments—that’s 12 days you’re not able to invest in your own business!
- Australian businesses were being paid 26.4 days late on average
- 90 per cent of small businesses fail because of lack of cash flow
- Australian small businesses are owed $26 million in unpaid invoices
What can small business owners do to help avoid late paying customers?
Here are a few strategies that can help lessen the likelihood of late payment:
- Wherever possible, negotiate upfront payments, or at least 50% payment upfront. For example, a florist might ask the venue to pay 50% of the fee before the event
- Make late payment fees a part of your payment terms. Be sure to state this at the start of the relationship, for example, an extra 2% penalty could be incurred after 30 days, or 3% after 60 days of late payment
- Discuss payment and invoicing terms upfront. It may feel awkward—particularly if you’re a freelancer dealing with a big, new corporate client—but you need and deserve to get paid on time. Your ongoing business depends on it. Then firmly enforce your terms!
What procedures should small businesses have in place for late or overdue payments?
It’s smart to have a system in place for dealing with late payments. For starters, take prompt action whenever an invoice tips into overdue—even if it’s just by a day or two. Ideally, automate this process using software such as Reckon, MYOB or Xero.
Have a standard, polite email reminder that gets sent as soon as a payment is overdue. If that doesn’t work, it’s time to send another email. Remind the payer of those late interest charges you’ve spelled out in your terms of payment.
Still no joy? Then it’s time to call their accounts payable department directly and start hounding them. (Or perhaps your lawyer if the payment is very large and very outstanding).
What is the best way to deal with a recurring late payment client?
First, give them the benefit of the doubt and try and have an upfront, professional conversation about how this is affecting you. Be sure to explain how this affects your cash flow and the ongoing relationship. Finally, ask how you can work together to improve matters. You might have ideas about how to streamline processes and methods of communication.
Consider the value of the relationship. If the late-payer can’t get your goods and services easily from a competitor, you may try threatening to withhold goods until they pay up. If all else fails, it’s worth considering if the cost of their late payments is affecting your bottom line seriously enough to sever the relationship.
Finally, always make sure you aren’t relying too much on any one client. If you have diversified your income stream, then late payment from one particular problem client will have less of an overall impact on your business.
Are you experiencing cash flow problems because of late payments? Find out how Prospa can help.