Simple Business Guide #7 - How to make sure your customers pay you on time
Cash flow is undoubtedly one of the most important things to focus on when running your own business, and a large part of that cash flow is money coming in from your customers. So how do you make sure your customers pay you on time, and what should you do if they don't?
Choose the right customers
It's tempting when you start your own business, or as you start to grow your business, to just take any new business that comes your way. However taking some time to objectively review the customer before you accept them is important, as there is no point in making a sale if you don't receive the money for it. Do you know and trust the customer? Have you heard anything negative about them from other people? Is it worth doing a credit check on them? This can be a very cost effective way of checking how reliable they are at paying their bills, or also at highlighting any financial problems they may be having.
Agree payment terms
Before you even start any work, or supply any goods, make sure you agree payment terms with your customer. And don't feel obliged to offer credit to new customers, or even existing ones. It is becoming more common, especially for service businesses, to ask for payment, or at least part-payment, up-front before the work is done. And if you do offer credit, think about the consequences to your cash flow of doing so. Have you got other sources of cash to see you through until the customer pays you?
Get your invoicing process right
Make sure that you invoice regularly, instead of leaving it until the end of the month. As soon as the work is complete, or the goods are delivered, raise the invoice and send it out. Always double check your invoice before you send it out as well to make sure it is correct and as agreed with the customer, as an incorrect invoice can cause further delays in getting your cash in. Some companies also phone their customers to check they have received the invoice, as "I haven't received your invoice - it must have got lost in the post" is a common excuse for non-payment.
Chase late payers early
As soon as an invoice becomes overdue, don't be afraid to contact the customer and chase them for payment. Make sure you keep a log of who you spoke to, what they said and any promises they make. Follow this call up with an email confirming what was said and agreed, and then keep a close eye on it to make sure they meet their promises. If not, get straight back on the phone. If you find the same customers pay you late repeatedly, then firstly consider whether or not you want to carry on dealing with them, and if you do, arrange a meeting with them to discuss their payment history and how to improve it.
Early payment discounts
In some cases in can be cost effective to offer an early payment discount to your customers if they pay you quicker than they normally would. You need to work out if the discount you offer them is a price you are willing to pay to get the money in early. However beware of customers who take the early payment discount, and then still pay you to their normal credit terms - all you are doing now is effectively giving them money for nothing.
Charging interest for late payment
There is a statutory right to charge interest on late payments, normally at 8% above the Bank of England base rate. Alternatively you can build a different rate into your terms and conditions. In reality though, charging interest on late payment can be difficult, as it can damage your relationship with the customer and if they don't pay your debts, then they are even less likely to pay you interest.
Invoice discounting/Factoring
Invoice discounting and factoring are where you get a third party company to effectively lend you money secured on your outstanding invoices. They advance you say 75% of the invoice value as soon as you raise it, and then when the customer pays you, you repay them the 75% plus interest. This can be a useful way for businesses which are growing fast to generate cash quickly to finance this growth. On the other hand it can be quite expensive, and some factoring companies can be quite selective in which invoices they will accept, only allowing ones where your customer is credit worthy.
Debt recovery
The final option if your customer refuses to pay you is to take legal action, although due to the time and cost involved, this really should be your last choice. The first step would be for your solicitor to send the customer a letter, which is often enough to jolt them into action. However, if this is ineffective, then you need to consider taking court proceedings against them. You should of course consider if it is worth the time and cost of doing this, or whether to just stop dealing with the customer and write the debt off, as this might be the lesser of two evils.
Conclusion
In short make sure you take time to monitor your debtors and keep on top of them. Invoice regularly and chase for payment even more regularly. There is a well known saying in credit management departments that "he who shouts loudest gets paid first", so don't be afraid to fight your corner, reinforce your payment terms and chase overdue debts vigorously.
If you found this article useful why not check out our other business guides, or you can sign up for our monthly newletter by filling in the form on the right - we will then send you our newsletter with other useful articles and hints and tips.
If you would like to discuss anything in this article, or need some help getting your business off the ground, or taking it to the next level, then please feel free to contact us. Don't forget - the first consultation is FREE.
Write a comment
Posts: 2
Reply #1 on : Tue February 15, 2011, 15:33:01