After putting hours of hard work into your product or service, it makes sense to expect that you’ll get paid by the agreed time.
Unfortunately, that’s not always the case, with research from Xero showing that in an average month, 48% of invoices issued by small businesses are paid past their due date.
In total, Xero estimates small business owners and managers are spending two working weeks a year chasing late payments.
That’s time that could, and should, be spent on more valuable things, whether you’re developing your business or spending time with friends and family.
And for small businesses in particular, any amount of cashflow disruption can cause serious problems, making late payments a real risk to contend with. So what can you do to manage it?
Make payments easy
In reality, you can’t control when your customers pay you, but you can make it as easy as possible for them to do so on time.
To begin with, make sure you’re clear from the start about your payment terms. Set these out before you accept an order, so you and your customers are on the same page about what’s expected and when.
It might also help to review your terms, and make sure they do their job in protecting you against late payment. For example, are customers required to make a deposit on large orders? Are there consequences if they miss the payment deadline, such as interest and debt recovery charges?
You might not need to enforce the rules in your payment terms, but putting them in writing will make it much easier to deter customers from paying late.
Once you’ve completed the work, send the invoice as soon as possible. Again, make sure this covers all the information a customer will need to send their payment, and is easy to read.
After you’ve sent the invoice, be prepared to follow up with reminders – you could send a message ahead of the due date, on the due date, and afterwards if the payment is overdue.
Talk to the customer
While written reminders can be a helpful nudge, the best way to address an overdue payment is to speak to your customer directly.
It might turn out that your customer is experiencing cashflow issues that are stopping them from making the payment, or they’ve simply forgotten about it or haven’t received your invoice. Either way, these issues are much easier to resolve with a quick phone call than over email.
Taking legal action should be your last resort, after you’ve chased the payment and tried to reach an agreement with your customer. You can also complain to the small business commissioner if you haven’t been paid on time by a larger business.
Pick and choose
If some of your customers are causing persistent problems, it might be time to get ruthless and stop working with those who aren’t paying you on time.
It sounds counterintuitive to turn down work, but consistently late-paying customers could be costing you more in the time spent chasing them than you receive in return.
One way to think about this is to put your customers into different groups: ‘good’ customers who always pay on time, ‘bad’ customers who cause problems and don’t pay much in return, and those who fall somewhere in between.
From there, you can see if there’s any way to improve the situation with your more problematic clients, or if you’re in a position to refuse orders from them.
Talk to us
If your business is struggling with late payments, we can help. We’ll set up your invoicing and payment process, and work with you to manage your cashflow.
Get in touch to talk about your business.