In November 2016, an FSB statement claimed that nearly 50,000 British SMEs fail every year due to late payments. A survey in January of that year suggested that these companies were losing an estimated £255bn in late payments, with 1% of these small companies having $1m or more in payments outstanding. One year later, this figure had changed to 52% of British SMEs having £44.6bn outstanding in late payments, with 9% being owed over £100,000.
The reduction in overall debt may represent a response to the government's 2016 Enterprise Act, which aimed at tackling the problem, but it's still a fact that only one missed or late payment can cause a substantial knock-on effect in the cashflow of a small business. The new legislation forces larger UK companies to report regularly on their payment practices, including the average payment time for invoices, in the hope that this will encourage them to pay smaller suppliers in a more timely fashion.
Although this has improved the situation, late payments are still an issue for new, small and micro-businesses. Larger organisations that still delay timely payment are ignoring the repercussions of this failure on smaller businesses. Launching a small business is stressful enough, without the additional pressure of late payments on their cashflow.
What can small business owners and startups do to avoid and tackle late payment issues?
1. Consider electronic invoicing
Electronic invoicing can significantly improve cashflow, even instant card transfers. Automating the entire process can make payments easier and quicker, for customers and suppliers too, which should encourage swifter settlement.
2. Push harder for big business payments
Consider penalising large enterprises who delay payments to optimise their own cashflow. Small business owners are entitled to charge interest, for example, but many are either unaware of it or are afraid of losing their larger customers.
3. Enforce 30-day payment terms
This is also an enforceable obligation, and a standard time-period for most business payments. Business owners should include this time limit in its payment terms, and start chasing on day 31. The longer the delay between delivery and payment, the harder it is to get the money back.
4. Get the books straight
A complete overview of income and outgoings enables a business to make better projections. Payments due should be clearly identifiable so they can be chased immediately. These accounting tasks can be accomplished today by software packages that provide real-time financial access. Analysing the health of a business instantly also enables faster and better-informed business decisions.
5. Optimise customer relationships
Building good customer relationships is more important than just retaining their loyalty. Committing time and effort towards a better personal knowledge of customers can pay off when it comes to bill-paying time. Customers who are personally engaged, both with a company's accounting team as well as with their sales contacts, are less likely to give grief over paying invoices.
6. Set aside reserves for tough times
It can be difficult to stretch finances even thinner than they may be already, but having a rainy day reserve can provide much needed reassurance if payments are delayed.