How to Deal with Late Payment

Written by admin on April 1st, 2011

Credit control has never been more important. One inevitable consequence of the downturn is an increasing number of companies addressing their own cashflow difficulties by delaying payment to their suppliers. Thus, the company that used to pay 30 days after receiving an invoice may now hold off on payment for 45 or even 60 days.

The  evidence that late payment is on the increase is more than anecdotal. According to an independent survey of accountancy firms carried out on behalf of Venture earlier this year, almost a quarter of Britain’s small and medium sized companies have seen an increase in debtor days. Of those who were affected, the average increase in payment time is 21 days.

This kind of delay can have a serious impact on cashflow. If a business generates the greater part of its revenue from just a handful of large customers, late payment by even one of them will affect the amount of working capital  available. The cheque for several thousand pounds that was due to arrive at the end of June instead makes an appearance in the latter half of July. Meanwhile, the hard-pressed supplier struggles to pay bills and meet staff costs.

Which brings us back to the importance of credit control. In the current economic climate it is vitally important to ensure that sales are converted into cash as quickly and effectively as possible. The key here is a pro-active approach to credit control. If your customers are simply paying late – rather than renegotiating longer payment periods – then you should be taking steps to ensure they make good on their debts and that they do so on time.

Know your client

What does this mean in practice? Well, the first step is to fully understand your contractual obligations to the customer. When the economy slides some businesses will look for excuses to pay late or even not pay at all. For this reason you should be absolutely clear about the terms and conditions of any supply contracts. What are delivery deadlines? Is there any special paperwork required for approval? What are the penalties for non-compliance?

In the case of existing contracts you take whatever steps are necessary to comply with all aspects of the terms and conditions. Meanwhile, when new customers come aboard you should ensure that you are in a position to meet contractual obligations and are comfortable with the proposed payment terms. In an ideal world, you should be able to stipulate your payment requirements, but there is always a balance of power in negotiations. For instance, it was reported in the Financial Times that some major retailers have responded to pressure to cut prices by renegotiating extended credit terms with suppliers from 30 to 60 days. In return for a major order you may well have to swallow more days of credit than you would prefer. But before signing on the dotted line, you should be sure that you have the finances in place to coverthe gap between invoice and payment, which is where your Factoring or Invoice Discounting facility comes into play.

However, you can also improve your cash situation by ensuring that as many clients as possible pay on 30 day terms. This will mean that those who do pay over 60 or 90 days will have less impact on your cashflow. It’s also worth finding out as much as you can about your client’s processes. When do they process invoices? How many cheque runs do they have every month and when is the money sent out? By knowing this you’ll have a better idea of when to expect payment and your cashflow will become more predictable as a result.

Equally, you should look closely at your credit control processes. Invoices should be sent promptly when work is completedand the date for expected payment logged on your system. When payment is due, it’s important to chase the cheque.

Outsourcing credit control

Cashflow benefits aside, having a Factoring arrangement in place takes away the headache of managing your own proactive credit control operation. Rather than wasting valuable management time chasing clients for payment, you simply outsource that chore to the specialists, who will provide a dedicated credit controller and operate to your business’s desired style of collection.

This can mean that debts are settled much more quickly. Credit control tends to be a peripheral activity for most small and medium sized companies, who focus their time on sales and production. It is, however, a core activity for Factoring providers, who typically ensure that debts are settled on or ahead of time. Performance varies from provider to provider. At Venture we collect our clients’ invoices two weeks ahead of the industry average, according to independent research by Business Money. Of course, if you combine your Factoring facility with Bad Debt Protection you are protected not only if your customer fails to pay due to insolvency, but also if the covered invoice is not paid within 120 days of the due date.

You may already be well aware of how damaging late payment or long settlement periods can be to your business. But if you plan well ahead, get to know your clients,ensure robust credit control procedures and put the right financial solutions in place, you can ensure your company has the cash it needs, when it needs it.

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