Late payment is one of the leading causes of cash flow problems. And, without adequate preparation, even a single late payment can have a significant impact on sustainability and profitability. Therefore, it’s vital to prepare for the worst to reduce the risks to your business.
Here are seven ways how:
1. Spread your customer base as widely as possible
Relying on a single customer for your income can make late payment potentially devastating. But by pursuing a wide customer base you can mitigate the risk of over-reliance on one single customer. This affords you the freedom to stay in control and say no if a customer chooses to move the goal posts and demand payment terms that would be damaging to your business.
2. Set out payment terms before committing to orders
Your terms and conditions are a great tool for safeguarding your business in the event of late payment. By setting these out at the start of your business relationship you ensure that both parties are on the same page and know exactly what will happen if payment isn’t made on time. Plus, in the event something does go wrong, by having your terms in writing you have solid evidence that you can produce in court if needed.
3. Get to know your customers
Knowledge is power and the more you know about your customers and their payment habits the more likely you are to get paid. To get to know your customers you can use account opening forms, credit checks, online searches and relationship building. The information gained from these resources can then be used to help you decide the best course of action when chasing late payment.
4. Keep on top of your sales ledger
One of the most important ways to prepare for late payment is to know precisely when invoices are due. Without this knowledge, your credit control process will lose its efficiency and punctuality. It’s therefore vital that you regularly review your sales ledger to ensure that your customers’ payment activity is always observed. Then, as soon as an invoice exceeds terms you can start the process to protect your business.
5. Have clear procedures
Once an invoice becomes overdue, the pressure’s on as the likelihood of collecting the debt in full decreases as the debt grows older. It’s therefore vital to have a clear procedure in place so that you can start the process of chasing that debt as soon as possible. Your strategy for chasing overdue payments could include calling as soon as the invoice exceeds terms, charging late payment interest or even escalating the debt to a specialist commercial debt collection agency after a certain time.
6. Protect your cash flow
At the very least you should always keep an up-to-date cash flow forecast so that in the event of late payment, you know if your cash flow can cope without that income. But it’s also wise to have a contingency plan in place should you need a cash flow boost. That could be to negotiate an extension to your credit terms with suppliers, request earlier payment from another customer or even to seek additional finance. It can often be beneficial to prepare for the worst by acquiring credit protection. Credit insurance protects a business’s cash flow from the repercussions of late payment and bad debts by safeguarding the business from non-payment through customer insolvency or protracted default.
7. Partner with a debt collection agency you can trust
As discussed previously, as debts grow older they become more difficult to collect. Therefore, it’s vital that as soon as you’ve exhausted all of your internal efforts you make the most of the other resources available to you. Specialist commercial debt collection agencies excel at the recovery of particularly outstanding debts, dedicating the time and attention to each individual customer that you may no longer be able to afford. By partnering with a debt collection agency in advance of being paid late, you can speed up the process of handing over the debt to increase your chances of successfully collecting payment.
Alex Hilton-Baird, Managing Director, Hilton-Baird Collection Services