When it comes to managing the finance for an SME, few words are more daunting than insolvency. Yet unfortunately, SME owners and managers know all too well that becoming insolvent is a very real risk. ASIC reported a total of 2,014 companies that entered into external administration in the 2014 March quarter. Poor cash flow caused by a growing pile of unpaid invoices can be the difference between make-or-break. Don’t become another statistic for insolvency.
Outstanding invoices negatively impact your bottom line. They reduce cash flow and can be especially detrimental for SMEs awaiting payment to cover bills, wages and other expenses. It is vital to minimise outstanding invoices and to get clients to work with your payment terms. However, a recent survey conducted by finance magazine Money in Business found that overdue invoices are rife. Of the people surveyed, 20% had more than 26 invoices overdue each month. For every day that an invoice goes unpaid, you are effectively loaning the business money interest free. But you are not a bank and loaning money is not your role! So, how do you get your clients to work with your payment terms?
Set payment terms
Before you can get customers to work with your payment terms, you first need to decide what you want your payment terms to be. Do you expect your customers to make a partial payment prior to receiving your product or service? Do you want to offer your customers 7, 14, or 30 day payment terms after the invoice date? Or do you want your customers’ payment terms to be shorter than your suppliers’ payment terms to avoid cash flow issues? These are all important things to consider when setting your payment terms.
Agree on payment terms before beginning business.
Although it may seem obvious, after considering your payment terms, you need to ensure you clearly communicate to your customers what your payment terms are. ASIC suggests creating a credit agreement that outlines your payment terms in writing and that you and your customer signs. Setting your payment terms and being clear with your customers about your terms from the start will help eliminate cash flow issues and prevent disagreements down the track.
Consider penalties for late payment
Setting payment terms is pointless if they are not adhered to. Just as many banks charge extra interest or fees for late payments, you too have the right to impose fees for late payments. A late payment clause can be included in your credit agreement and outlines the penalties (such as interest, late fees and/or collection costs) if payments are made after the due date. It is important however to note that your customers can also provide documentation outlining terms so be wary of any documents from your customers that may negatively impact your payment terms, such as your penalties for late payments.
Prevention is better than cure
They say prevention is better than cure. Reminder notifications can often be far more effective than missed payment notifications. It exemplifies good customer service by providing a friendly reminder, and moreover, if a late payer complains about a late payment fee, you can then explain that you understand it can sometimes be hard to stay on top of all payments, but that you have done what you can to help by outlining your payment terms, as well as reminding them prior to payment.
If you think payment reminders sound great, but that you don’t have the time to manually email or SMS every client to remind them that a payment will soon be due, Ezidebit offers clients automated payment reminders to save you time and money – and – late invoices.
Want to know more?Click here to talk with one of our friendly payments consultants about getting started today.