Effective credit control is crucial for any company, as it ensures a healthy cash flow. Without it, the business would not be able to function efficiently.
This is a particularly pressing issue for smaller firms, many of which do not have the resources or financial flexibility to accommodate late payment from clients.
Considering the prevalence of late payments, particularly to small and medium-sized enterprises (SMEs), many businesses will be asking what they can do to address this risk to their operation.
The first task - ensure you are doing the basics right
Below is a checklist outlining some fundamental steps that will make the invoicing process as clear and straightforward as possible, reducing the risk of clients making late payments.
1. Confirm a payment date
This is a fundamental step, but the fact it is so simple means it could easily be forgotten. If both you and your client are fully aware of the date you expect payment, the risk of confusion and dispute will be reduced.
2. Confirm how the client is going to pay
This is another important check that guarantees clarity and transparency in the invoicing process. Will the client be making a direct Bacs payment, or paying by cheque? You should also ascertain whether the payment will go directly to the bank or via post to the office address, and make sure the customer has the right bank details and address.
3. Confirm a relevant email address
In this day and age, email could be your main method of communication with a client, so be sure to include the appropriate email address with each invoice. This is particularly useful for the delivery of remittance advices informing you that payment has been made.
4. Confirm the client has the correct purchase order reference
The purchase order is a key part of the contract between the product or service provider and the buyer, so it is crucial to ensure it has the right reference information. This will help to avoid delays in gaining agreement to pay.
5. Confirm any remaining balance on your sales ledger
A direct and open relationship between you and your clients is beneficial for all, so always be communicative about outstanding balances in your sales ledger. This will identify any potential problem areas early on and give you an opportunity to provide copy invoices or delivery notes.
6. Confirm the client's trading style
What sort of business are you dealing with? Is it a limited company, a partnership or a sole trader, for instance? Being fully aware of the sort of customer you are trading with will help you to make sure you have the right credit score information.
7. Keep your diary up to date
It is a basic tool, but a well-kept and up-to-date diary can be hugely useful when it comes to tracking invoices and confirming the receipt of funds.
Other courses of action
In January 2014, the Federation of Small Businesses (FSB) released data showing that more than half (51 per cent) of its members providing products or services to larger, private sector organisations were paid beyond the agreed date last year.
The FSB urged the government to strengthen the Prompt Payment Code (PPC) and relaunch the PPC website to give greater prominence to the 'challenge' function, which allows SMEs to complain about late payment.
Furthermore, all PPC signatories should be made to state their maximum and average payment terms, while a named contact should be provided for small firms experiencing difficulties, according to the FSB.
John Allan, national chairman of the lobbying group, said: "As the economy gets stronger we must do everything we can to help businesses and late payment is an issue the government and large businesses must tackle."
He added: "Small firms need confidence to charge interest and complain about late payments. The fear among the smallest firms is that complaining about late payment should result in lost future work, which will harm cash flow for their business."
If you have taken all the basic steps outlined in the checklist above but are still struggling with late payments, there should be an established process in place within your business to address the issue.
Firstly, it is important to keep in regular contact with the client. Try to get in touch with them immediately if payment does not arrive by the agreed date, and be professional but assertive when chasing up outstanding amounts.
Encouraging a customer to pay by electronic transfer or direct debt, rather than by cheque, could ensure you receive payment quicker.
The process for addressing late payments should also include checks that every part of the invoicing procedure has been conducted properly so far. Is all of the information on the invoice correct, for instance, and has the customer confirmed receipt? Has the client raised any unresolved queries about the payment, and was there clear agreement on payment terms?
If payment is still not forthcoming after these checks and actions, or if the customer is refusing to even talk to you, the next step could be using a debt collection agency or going down the legal route. While this is a last resort, the threat of legal action could be enough to get your client to pay up.
If you find yourself in this unpleasant situation with a customer, think carefully about working with them again in future, and make sure you always conduct thorough credit record checks before trading with a new client.
After all, turning down an order you're not entirely sure about is preferable to supplying a product or service you're not paid for.
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