PLUGGING THE LATE PAYMENT HOLE (September 14, 2017)
Late payment is a burning issue for the majority of SMEs at the present time. Will late payers always be with us probably. Completely removing the risk of late payment is unlikely, but there are measures business owners can take to limit the chances of it happening to them.
Here are some simple steps you can take to reduce the chances of it happening to your business and getting any outstanding accounts cleared:
1. Due Diligence
Winning a new client is very exciting for any business, especially if it’s a big chunk of business. However, before the celebrations begin, we always recommend carrying out some checks on the new customer to ensure they have the money to pay your invoices and that they’re reliable payers. It doesn’t take much time or cost and can save you a lot of headache and money – down the road.
Some of the most common checks include credit reports, such as those offered by Centrix, that give an indication of the company’s financial health. Other methods include face-to-face meetings and reference checks with their existing suppliers. Being on the ground and getting a feeling for the way they run business is invaluable, while speaking to existing and past suppliers can flag any potential issues before you’re tied-in.
2. Manage Your Account Receivables
Business owners who constantly ignore the aging of their receivables are creating a problem for themselves that could have dire consequences down the road. It is essential that receivables are managed efficiently to ensure the health of the company.
Past due accounts are a problem that can increases costs especially if the business is using receivables as a form of leverage. Even if not the impact on cash flow is in itself a costly issue. Be sure to issue your invoices when you should and to remind clients when they are due.
3. Hire a Credit Manager
While on the surface hiring a dedicated credit manager may seem like another cost, the value they bring can quickly make up for it. As they are the ones doing the pre-delivery credit checks and then if needed any chasing for payments, credit managers provide a buffer between you, the business owner, and your customer, ensuring relationships are kept intact.
Where an invoice is overdue, a good credit manager can actually help strengthen your client relationships by working with them to find creative solutions to resolve their delinquency. By working with them rather than hounding for payment, they pave the way for a smoother future payment processes and potential repeat business.
If the cost of hiring a full-time credit manager is beyond your budget, it’s worth looking into using a freelance credit manager. There are a number of people offering such a service. Just make sure they are a good fit with your company and industry.
4. Have a Back-Up
Business growth is rarely seen as a problem or matter for concern, but rapid growth in the receivable ledger due to increased business can sometimes represent a serious problem. Receivable growth may well diminish working capital and put further restraints on growth. In such situations, it’s important that you have a financial back-up, that will allow to keep the business going, especially if you work with a small number of high value clients.
Most business owners have some facilities in place with their bank to cover such circumstances. However, there will be a limit on the facility, so a more robust backup plan may be called for if this is unable to be increased.
Today, businesses have a host of alternative financing options to help keep the cash flowing. Some of the most popular options include spot factoring, where you sell your invoices at a marginal discount before they have matured, asset finance, where company assets are leveraged to secure a loan, and bridging loans. Each option has strengths and weaknesses so be sure that the option you choose is most suitable to the needs of your business.
Plan to plan for the unexpected.