Dealing with late payment
The credit crunch is already putting the squeeze on small businesses so the last thing you want to deal with is late payments. But how do you maintain a healthy cash flow? Louise Druce investigates.
It was a landmark victory for small business MTa International when it forced pharmaceutical giant Alliance Boots' to backtrack on plans to force suppliers to accept to increased payment terms from 30 to 75 days and a 2.5% 'settlement discount' for paying within the extended period.
John Wright, Federation of Small Businesses
However, with the credit crunch gripping the nation, it could be a short-lived victory as the Federation of Small Businesses (FSB) believes large companies are still exploiting SMEs by delaying invoice payments as they are also forced to tighten their own purse strings. "Big companies appear to be aware that small businesses are afraid of taking them on over payment terms and are abusing their power as a result," said FSB national chairman John Wright.
"It is shocking that large companies think it is acceptable to use them as an unofficial source of credit."
Even before the economic downturn, a 2007 study by Leeds University Business School claimed small firms wrote off an average of £14,000 worth of debt each year. In addition, separate research by lobby group Forum of Private Business (FPB), also carried out last year, revealed that well over three quarters of companies said late payments had a serious impact on cashflow.
Most SMEs just accept that late payments are part and parcel of doing business but should you put up and shut up or risk of jeopardising good relations with large clients to get invoices paid on time? "Small businesses have got to overcome this good old British reticence to make a fuss," says Martin Williams, managing director of credit management specialists Graydon UK.
"We don't like complaining but small businesses should make a fuss when they are being bullied by big companies who won't pay them. You wouldn't turn round to your staff and say you're not being paid for the next 90 days."
FPB spokesman Phil McCabe agrees: "If you're struggling to access finance it becomes more important you are paid on time to maintain any kind of cashflow, let alone a healthy cashflow," he adds. "We applaud MTa International for standing up to Boots but not all small firms are in such a privileged position to be able to do that. As the economic downturn becomes worse and more sustained, the spectre of late payments becomes worse as well."
Good housekeeping
The government has provided some legal redress when it comes to late payments in the form of the Late Payments and Commercial Debts (Interest) Act, although McCabe admits many businesses are still reluctant to stick their head above the parapet and get involved in legal wrangles that could alienate clients. Another issue is that in some cases, for example, you still having to chase creditors even after a win in the small claims court.
However, before considering the route of the law, Williams argues there is a lot businesses can do to help themselves first. For one thing, he recommends shelving any plans that involve risk to the business and to try to avoid relying on a large company for 90% of your business – spread your business around to avoid one potentially big, bad debt.
And at a time when British Gas has recently announced a controversial 35% price hike, he also adds that you might want to think about shopping around to reduce other costs such as utilities.
Where firms come particularly unstuck, however, is when invoicing and chasing payments. If the same amount of cash is being billed at regular intervals, it may be worth setting up an automated payment account such as PayPal or a direct debit. But a classic mistake for SMEs who have to do business on credit is forgetting to specify terms and conditions, including the most important factor: how many days the company has to pay the bill.
"We have 'payment inducement' stickers that you can put on letters stating that the company subscribes to a credit reference agency and will report companies for late payment," says Williams. "Most people in the accounting department aren't suddenly going to say they will have nothing to do with you; they'll put it to the top of the pile. You have to be assertive. If you don’t ask, you don’t get."
Signed, deal, delivered
Design agency Creospace prefers a partnering approach with clients to try to create a more 'hassle free' professional relationship, but still admits it's a "holy grail" trying to avoid doing business with late payers altogether. "Not paying on time for something you have used is totally unprofessional and it really offends me when clients use every trick in the book not to pay," says a spokesman.
He offers tips such as adding 10% to the invoice and stating that a discount will be given if the company pays on time, or attaching late payment penalties. He is also among those who would consider withholding products or services if they are not paid for the work they've done.
"There will always be those who complain but it is so simple - you get what you pay for," said one entrepreneur. "The work I do is [on an] hourly rate, so it's difficult to charge upfront," said another, who admits to have held back work until invoices are paid.
Martin Williams, managing director, Graydon UK
When it comes to chasing payments, Williams also advises firms to not just rely on a prompting letter. A polite but firm phonecall can also jolt big firms into action. For example, when you call you can ask if they received the goods, were the goods exactly what they ordered and were they satisfied with the quality and service. If so, you can add the phrase 'I can expect payment on time then?'
"There's nothing worse than a company spotting a weakness," says Williams. "If you don't chase it up, the invoice will just sit at the bottom of the pile."
Battening down the hatches
For the majority of SMEs, it should just be a case of battening down the hatches and weathering the economic storm. There are businesses that will be particularly vulnerable though, says William, especially the haulage, retail and building industries. The odds of failure are also stacking up against start-ups, which already have to face a 50% chance of going bust in the first two-years of life.
On the positive side, Williams believes once the economy picks up again, the fact that businesses have introduced good housekeeping practices could keep them in better stead for the future. "Over the last 15 years we've had a relatively stable environment. People have become complacent, let things slip and don't worry about collecting money too much," he adds.
"If you get into good habits you'll continue with good habits, which means you'll do even better in the good times."
1. Decide whether it is worth a fight. There are no strict rules about whether to pursue a debt and which approach to take. Much depends on the individual circumstances of the debt and the customer.
2. Consider your customer. If it is a valued customer, be diplomatic in your approach. If it is a one-off customer, you can be more assertive.
3. Assess why the customer has refused to pay. Is there a dispute over the goods? If so, resolve it immediately. Otherwise, the debt will be difficult to recover. If the customer is in cash flow difficulties, you may wish to try to negotiate a payment on account. Contact your local court to check the Register of County Court Judgements to find out whether there are already outstanding judgements against the customer. If so, the debt may be irrecoverable.
4. Consider a debt collection agency. If the customer does not have a good reason for not paying, you may choose to use a debt collection agency or a solicitor specialising in debt collection. You could also serve a statutory demand or go to court.
5. If you opt for debt collectors, ensure you make checks before using an agency. Is it registered with the Credit Services Association? What methods does it use? If it uses unlawful methods such as harassment you could be liable.
6. For debts over £750, you can issue a statutory demand. This is a formal demand for payment in a specified format. If the debt is not paid after 21 days and you think there is money available you can petition the court to wind up the company, or make an individual bankrupt.
7. Small claims. Opting for the Small Claims Track is useful and inexpensive in pursuing debts of up to £5,000. Court claims between £5,001 and £15,000 are dealt with by a fast-track procedure in the County Court. Claims over £15,000 can be issued in the High Court.
8. Remember that the real winners in debt recovery are often the lawyers and debt collection agency. Try to have a meaningful dialogue with your customer to find out why the debt has not been paid. Explain what steps you intend to take and try to reach an agreement.
9. Review your contracts. Ensure that they contain a dispute resolution procedure with your customer.
10. Speak to your accountant. For further information on debt recovery, use a chartered certified accountant.
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BusinessZONE - 6-Aug-2008
Categories: Money matters
Story read: 4593
Number of comments: 2
Cash is King
Alex Hilton-Baird, 09 August 2008 @ 09:28 AM
Hilton-Baird Financial Solutions works with owner managers to provide cash flow solutions for their businesses. To maintain a healthy cash flow for your business getting the basics right is the most important. With the credit crunch deepening and payment terms being extended we have put together a list of practical tips to help your business keep on top of its cash flow.
Top tips
1 - Get on top of your credit control procedures
Make sure that your terms and conditions are reviewed on a regular basis; delivery notes are collected and invoices raised on time. The sooner you raise an invoice the sooner you are likely to be paid.
2 - Put effort into your overdue balances
It costs a lot to finance outstanding balances and there is a higher risk of those balances turning into bad debts. Make sure you put time aside to reduce these.
3 - Motivating the sales team
Consider incentivising your sales teams to sell to customers that will ultimately pay. While increasing turnover is important, it shouldn’t be at the expense of profitability.
4 - Credit checks
Develop a habit of credit checking customers before selling to them. It pays in the long run. Also put key customers and suppliers on constant review. This will alert you to any material changes to their business, such as the late filling of accounts, change in directorships, downgrading of credit ratings, change of address or change of advisers.
5 - Share information
Don’t be afraid to talk to your competitors about their experience of selling to customers, particularly ones that you may share. Are they experiencing problems collecting money? If so, what are they doing to address the situation?
6- Review funding arrangements
Ensure you review existing finance agreements with your funders. Make time for a detailed check of loan agreements to see what facility terms are and what security has been pledged.
7 - Shop around
Benchmark your existing funding facilities to see if you are getting the best deal. If you are unsure about how to do this, take independent advice. You might be surprised at what deals are available.
8 - Correct funding
Make sure that you are funding the correct assets with the correct finance facility. You’d be surprised how often this is not the case. Also, ensure that your chosen providers have sufficient funding available to meet your needs, both now and in the future.
9 - It pays to talk
Funders don’t like surprises so keep them abreast of good or bad news. They will appreciate your honesty and it will allow time to work through the options.
10 - Take advice
If you are unsure about your next step in the wake of the fall-out from the recent credit crunch, then I would recommend seeking independent advice.
For more information on the Hilton-Baird Financial Solutions visit www.hiltonbaird.co.uk
Solutions to the problem of late payment
Jane Bennett, 06 August 2008 @ 11:39 AM
The Forum of Private Business (FPB) has launched a survey asking businesses how they deal with the problem of late payment and questioning how businesses can be better supported. We will feed the results directly into Government.
Please help by completing the survey available at www.fpb.org/surveys.
Thanks for your help!
Jane Bennett
Forum of Private Business
