Many small business owners aren’t aware that late paying customers are adding to the debt levels in their business. So, when small business operators contact us looking for ways to reduce the debt in their small business, our first recommendation is always: ‘Get your customers to pay on time.’
What are the costs of late payments to your business?
Late payers cost your business in two ways: firstly through the manual effort that goes into chasing late payments (particularly is this job is being escalated to your most senior and expensive staff members) and secondly through the harder to quantify opportunity costs of not having cash available to take advantage of business growth opportunities as they arise.
How to calculate the cost of chasing late payments:
For a couple of weeks, track the amount of time your staff spend on the following tasks:
chasing late payments (through phone calls, postal mail and so on)
tracking and reporting on who has paid and who is yet to pay
jumping between systems (such as MYOB, your internet banking portal plus any spreadsheets that need to be updated along the way)
all cash handling tasks such as counting cash, account reconciliation and visits to the bank to deposit cash.
The cost of stifled cash flow
If you’re already in the excellent habit of conducting a cash flow forecast at the beginning of every month, you’ve probably already witnessed the impact that late payments can have on how cash flows through business. If your cash flow forecast predicts a certain value in payments to hit your account on a given date, and then those payments don’t arrive, the domino effect con your business can range from the inconvenient to the catastrophic. The sad fact is that business insolvencies are on the rise in Australia – and the root cause of many of those insolvencies is cash flow problems that arise as a result of late payments stifling cash flow. Now is the time to conduct a cash flow health check in your small business so you can reduce your debt.
How to get your customers to pay on time
Small business owners are constantly asking our payments experts how to get their customers to pay on time. Our number one recommendation is always the same: automate, automate, automate! What would the impact on your organisation be if you could get the bulk of your customer base to pay you automatically on the day their invoice is due with no manual administration required from your end? Not only can automated payments software significantly improve the likelihood of your business getting paid on time, but it also educing the amount of time and money your organisation spends on manually processing payments from customers and chasing late payers.
Other tactics for getting your customers to pay on time include:
Reviewing your payment terms: Consider whether you could tweak your payment terms to facilitate earlier invoicing and faster payment.
Implementing incentives to pay on time: Would it work in your business to refer late payers to debt collection experts? Or do you prefer to reward good behaviour through offering a discount for invoices that are paid on time? In either scenario, consider whether the benefits outweigh the risks and always strive to keep your reputation intact.
Setting out a cash flow strategy: Set out a cash flow strategy to ensure your Sales, Finance and Management team are actively engaging your late payers on the phone – not on email. We recommend that you phone late payers on the day after your payment was due. Rather than asking, ‘When will you pay up?, we recommend you ask, ‘Is there any reason this bill has not been paid?’ This is a simple action that can motivate your customers to pay up fast.
Passing on the business: If you think a customer will be a late payer you can always decide not to do business with them. Remember, a sale isn’t a sale until you’ve been paid.
Get our expert cash flow guide
Discover how to get cash flow front and centre in your business with our free cash flow playbook. In our free playbook, you will discover:What is cash flow and why should you care?
Why and how you need to create a monthly cash flow forecast
Ways to improve your cash flow
You can download your free cash flow playbook here.