Receiving payments late can be detrimental to any business – regardless of its cash flow security. Not least because you’ll lose out on interest that you could have accumulated (unless you have an agreed late payment charge). But on a more substantial scale, being paid late can impact your company’s working capital and ability to meet debts.
The impact and dealing with late payments
Four in 10 businesses that are paid late will go on to pay their own suppliers late or struggle to pay their staff, according to Mike Cherry of the Federation of Small Businesses . This financial volatility can have a knock-on effect on staff retention and also damage relationships with suppliers.
Small and medium-sized enterprises (SMEs) are often the most affected by late payments, as they tend to work with a small pool of clients who each comprise a larger portion of their income. Which means late payment can have a significant impact on their cash flow. What’s more, SMEs may be more reluctant to chase clients for payment, for fear of damaging the relationship. But this eggshell approach may only perpetuate the situation.
The consequence of financial inefficiency
It’s important for companies to maintain an optimal Days Sales Outstanding (DSO) figure – which is how long it takes between a sale being made and collecting payment for that sale. Not only does a lower DSO figure support the financial and operational efficiency of your company, but it also filters down to your working capital ratio. This is important because investors, analysts and prospective partners may use this to assess the viability of your business. So what’s the best approach to tackle late payment?
Seven steps to tackle late payment
- Don’t downplay the importance of timely payment. It’s understandable that you may be nervous of pressing a valued client for payment, but remember the knock-on effect late payment could have on your business. Furthermore, by failing to take action you’re setting a precedent that this is ok. To support your action, make sure you have clear payment terms in your agreement or contract with the client, so that you can refer the client to these without any reservations.
- Take direct action. Wait a maximum of two days after the payment date has passed to bring it to the client’s attention. It may be that the invoice hasn’t even been processed or drawn to the attention of the finance department, so swift action can speed this process along.
- Ensure you have an effective collection call by telephone. Collection by telephone can be a direct and efficient method of chasing late payment. Establishing clear objectives and procedures, and delivering effective training to employees can make all the difference to your success rate – and potentially salvage the client relationship.
- Apply a short interval between actions. It’s important to allow the client time to deal with the late payment. However, after each action, decrease the time to the following action. And remember – if you’ve delivered a product or service, it is your right to be paid on time.
- After four actions, you have lost credibility. At this point it’s clear that your actions are not having an effect. Don’t dedicate more resources to chasing this payment. Escalate the issue instead.
- Involve the professionals. Having taken a systematic approach, it’s now time to involve payment collection professionals to save you time. They can use their resources and experience to determine the best way to collect payment.
- Learn from your mistakes. Make sure you use this experience to guide your actions in approaching other customers with similar behaviour. With future clients, you can benefit from having a free credit check performed before you sign the contract.