Managing late payments are a significant issue to small businesses, with £46.1 billion currently being owed to businesses. In 2008 the amount owed was £18.6 billion, less than half of what is currently owed. With the situation worsening, businesses need to take real action to ensure they have a healthy cash flow by managing their credit control effectively.

Government has stated that small businesses spend on average 130 hours a week chasing late payments, which equates to a cost of £1,500 per business. As small businesses are reliant on a healthy cash flow, late payments can have a huge impact on the liquidity of a business and can lead to insolvency. 34% of businesses have used external finance in the form of loans and overdrafts from banks to bridge the gap caused by late payments, resulting in interest charges of £180 million. With tightening profit margins, businesses should be looking at ways of getting their invoices settled quicker to avoid unnecessary costs.

Small businesses should therefore implement the following tips as a minimum to manage their cash flow effectively:

  • Ensure business has a clear and easy to implement credit control strategy. Setting out an approach which sets out the strategy on a day to day basis will assist in getting paid on time. For example business policy should state when reminders are sent, whether emails or telephone calls are appropriate, templates for reminder and when court action is required.
  • The key task before undertaking business with a prospect is “knowing your client/customer”. Credit should only be provided once a credit check has been done on a client. With financial circumstances changing all the time, it makes sense to ensure credit checks are an ongoing process.
  • Payment terms should be incorporated in detail, in the terms and conditions of the business. Terms should also be clearly stated on invoices and statements including late payment charges, so client is clear on the penalties for paying late.
  • Ensure clients are invoiced immediately at the agreed time. This could be a half way point when undertaking a job or on completion of a job. Depending on the type of service provided, a business dealing with tangible goods can with hold documents/products until invoices are settled, such as printers/publishers. Other service providers such as businesses in the construction sector or those providing an intangible service such as marketing services should invoice periodically.
  • Provide more than one way of making payment, such as direct debits and bank transfers. Avoid cheques which can delay processing. Bank details should be clearly stated on the invoice, ensuring client doesn’t have to look through wades of paperwork to find details which can put off clients to make payment.

If you require further small business cash flow tips then contact Avery Clifton Reading Accountants.