The effects are real – almost half of business insolvencies in Australia due to inadequate cash flow.
So, with more companies being left out of pocket for longer periods, here are our 10 tips for prompt payment – for you and your clients.
1. Know who you’re dealing with
Before you even start a working relationship with a customer you’ll be invoicing regularly, weigh up how much of a risk they pose. Credit check unknown entities and ask peers or professional networks to discover whether they have a bad reputation for settling debts.
2. Consider the nature of your customer relationships
Is it possible you might arrange a retainer agreement with a client or become a permanent consultant to them? Such an arrangement guarantees regular income in exchange for being ‘on call’ or for providing an agreed amount of goods or services on a regular basis.
3. Charge upfront
Consider asking customers for a proportion of the total owed upfront in exchange for a discount. If they can make an ultimate saving by paying, say, 50% on day one, you may be surprised how many clients cooperate.
4. Revisit payment policies
Ensure payment terms are clear from the outset, written into any agreements and explicit on invoices. Also consider renegotiating payment terms, perhaps offering a discount for early settlement of bills
5. Make it easy for clients to pay
The easier you make it for customers to pay you, the quicker the funds will be in your account. Cloud-based software allows invoices to be issued automatically, followed up as soon as they’re overdue and easily reconciled by the recipient. Digital invoices typically include a ‘pay now’ button to enable customers to click straight through to settle up immediately.
6. Automate chasing payments
New technology offers several inexpensive and easy-to-use products to do the hard work. Credit control apps such as Chaser, Satago and Fluidly send reminders about payments automatically before payments are due and then chase outstanding invoices if bills remain unpaid.
7. Prevention is better than cure
Automate payments to make late payment a near impossibility. Using a ‘pull’ payment mechanism, such as Direct Debit via a provider like GoCardless, means that cash owed is collected from a customer’s bank account automatically. This works even if the sums involved vary from one bill to the next. Funds arrive quickly and reliably and failed payments almost never occur.
8. Have a back-up plan
If you’re left out of pocket, how will you cover day-to-day expenses? Research alternative sources of finance to plug gaps in your cash flow, such as extending the business’s overdraft, taking out affordable short-term loans or using invoice discounting or factoring.
Many firms don’t want to resort to these options, but having an emergency plan is sensible to avoid business disruption or, worse still, becoming a late payer yourself.
9. Focus on client relationships
While tech can do a lot to improve payment processes and make cash flow more reliable, don’t neglect the human aspects of business relationships. Cultivate the individuals who handle payments within companies you’re billing. If you have an existing link with the right person, any communication over payments is likely to be more smooth, swift and productive.
10. Deal with repeat offenders
Develop a strict approach to handling persistent late payers. If you don’t get paid on time, be wary about continuing to work with the debtor concerned. Also, think about adding late payment penalties to contracts to dissuade clients from leaving you waiting for money in the future.
For more tips and advice on how you can take control of your firm’s cash flow – and advise your clients on the same, visit the Cash Flow Academy guide.