Running your own business can be extremely rewarding. Working with customers and delivering the products or services that meet their requirements and getting a satisfactory review for your service is happiness that you cannot achieve unless you are running your own business. Being a business owner, however, often gets frustrating especially when you suffer a cash crunch because none of your customers have paid on time.
Cash is the lifeblood of any business; without it, businesses cannot continue to operate. Businesses need cash to pay off not only their long-term liabilities but also their day-to-day expenses. This is why business owners need to chase outstanding invoices, especially those with overdue payment to bring back cash to the business the soonest time possible.
While it is ideal that it is the customers’ initiative to pay their invoices on time, it is the business owner’s duty to send out an invoice and make the customer pay on time. We don’t live in an ideal world, which is why Australia, according to the Small Business Ombudsman, has a rather established late payment culture.
What is a late payment?
Standard terms of credit in Australia include no credit, 7 days to pay, 21 days to pay, or 28 days to pay. Some sectors, according to CreditWatch, are even performing worst in terms of payment days:
- 30 days – wholesale trade
- 31 days – arts and recreation services
- 43 days – healthcare and social assistance
- 45 days – financial and insurance services
Depending on your sales or service contract, a late payment is any payment not made within the payment terms indicated in the contract. It works something like this: you issue an invoice and wait for payment within a reasonable payment term — which is 7 or 14 days from the date of the invoice or receipt of the invoice. Late payment occurs when your customer pays after or beyond the 7- to 14-day payment term. It is not considered late payment when your customer pays off the outstanding amount within the payment term.
Why are my customers paying late?
Numerous factors cause late payments, which factors may vary from one industry to another. As mentioned above, there are industries where late payment has become standard that everybody involved now thinks late payments is normal.
For example, in the construction industry, according to The Australian Financial Review, “12% of building companies are more than 60 days behind on debts owed to suppliers or contractors” in the past year. Late payments in the construction industry were also caused by different factors, including a massive supply chain crunch, rising costs of construction materials, site closures due to the pandemic, and labour shortage.
Ultimately, late payments are due to a decrease in cash flow in your client, which causes them to struggle with keeping up with timely payments. One late payment may be understandable, but two late payments may be too many and your client may now be using you as a bank instead.
Late payments are also an indication of financial stress, and you should do something about it as soon as you notice the signs of financial distress. How do you spot when a client is in financial distress?
Here are some common indicators of financial distress:
- your customer keeps on ordering supplies but is never paying
- your customer has defaulted more than once
- the length of time it takes for your customer to pay you gets extended
Here are more specific reasons why your customers are paying you late:
- Didn’t receive the invoice
- Invoice payment is pending
- Disputing invoice amounts
- Wanting to pay invoices in particular periods of the year
- No reason was given
- Invoices were not paid late
How is your business affected by late payments?
Going through the motions of your day-to-day business operations, you won’t notice the effects of late payment. However, when you sit down and do a review of your business finances, you will realize how much your business has suffered because of low cash flow as a result of longer turnaround of invoice payments.
“Small and medium-sized businesses are getting ripped off $7 billion a year because bigger businesses are not paying them $115 billion on time,” the Australian Financial Review reported in 2019, citing a research from Xero and AlphaBeta.
On the business level, when a small business doesn’t get paid the money it is owed, it is more vulnerable to disruption because it usually does not have a substantial cash reserve. The most serious effect of late payments is negative cash flow – and when money is tight, a business struggles to stay alive.
If your customers do not pay on time, you will also be forced to spend time to track them down and ask them to pay you. If that sounds easy enough, Slater Byrne Recoveries debt collectors will tell you that a typical debt collection process – with no snags – will take a minimum of three weeks; however, this process can take up more time due to a number of factors, including unresponsive debtor or debtor in administration.
Many small businesses even sometimes forgo debt recovery because of the following barriers:
- you don’t want to ruin your relationship with your client,
- your business has no dedicated resource to chase late payments,
- you have no dedicated staff assigned to collect debt, or
- you or your staff don’t know which invoices are due.
Late payments also have a “domino effect,” with businesses who are struggling with cash are less likely to make future investments into the business. They are also likely to struggle with complying with their obligations to their suppliers. When clients are slow to pay their invoices, it creates a cash flow shortage that can eventually halt a company’s day-to-day operations. This is especially true if a business is relying heavily on one large client or is hit by an event that it is not properly insured against. If slow payments drag on for months, an otherwise profitable company might end up closing for good. Many small businesses who have neither the staff nor the money to chase unpaid invoices may write these off as bad debt.
How can you make your customers pay on time?
Escalating your unpaid invoices to a debt collection agency is often seen as the first step to the last resort, the last resort being going to court to compel the debtor to pay. Debt collection can often be complicated and can cost you unnecessary money, especially when you have not earmarked debt collection costs in your business budget. There is no need for the unpaid invoices to reach the debt collectors when you set up certain protocols that can reduce late payments.
Tips to improve payment times:
- Send out invoices on time.
- Maintain communications with customers.
- Create a late payment policy.
- Reward prompt payment.
Send out invoices on time.
Sending out invoices on time is the first step in your payment process that you should do in order to make your customers pay on time. For how can they pay on time when they do not receive the invoice on time? The best practice in any industry is to send out an invoice once the services have been completed, whether partially or completely depending on your contact, or when the supplies have been delivered.
E-invoicing using an accounting software helps you send out invoices on time because most actions will be automated and can be pre-scheduled. The system also reduces errors in invoices, such as errors in names of customers, which also causes delay in the payment.
According to the Australian Taxation Office, it takes 36.7 days for a big business to pay an SME. Using e-invoicing will reduce payment times especially when the destination is using the same business management software.
Businesses also save $21.69 when they switch to e-invoicing. According to the ATO, a business spends $9.18 to process an e-invoice, while a business will spend $30.87 to process a paper invoice and $27.67 to process a PDF invoice. Further, as e-invoices conform to standards, information exchanged is correct and high quality. E-invoicing reduces manual handling and re-keying of information to make sure that there are few incorrect or lost invoices. Consequently, e-invoicing reduces fake or compromised invoices, billing scams, and money loss.
The ATO said small businesses have to collect $26 billion in unpaid invoices at any given time. Of all late payments, over 20% are due to errors on invoices. Over 20% of erroneous invoices are due to the invoice being sent to the wrong recipient following manual data entry.
Maintain communications with customers.
Building a good relationship with your customers takes time but this is worth doing because the gains will be for the long-term. When you have a good relationship with your customers, they are more likely to put your invoices at the top of their to-pay list.
A good relationship starts with constant communication. Even when it takes a little bit of effort, it is a good idea to occasionally check in on your customers, follow and interact with them in their social media accounts, or send in greetings on special occasions such as business anniversary or significant milestones.
When you have a good relationship with your customers, it becomes easier for you to follow up on an unpaid invoice.
Create a late payment policy.
A well-drafted Terms and Conditions helps ensure that you get paid on time. To further strengthen your T&C, include a late payment policy where you can impose late payment fees or refer the invoices to a third-party debt collection agency in case of late payment.
You must also communicate your late payment policy to your customers earlier on in your relationship. This way, clients will know when they need to pay you and can make the necessary adjustments or notes to their budget.
Creating an effective T&C does not have to be expensive or complicated. The SBR Team has helped several of our clients improve their T&Cs to fit their needs and goals. For example, we have helped them address the following concerns:
- debt recovery costs to be added on top of the outstanding amount if it is outside your payment terms;
- security clauses—including real property charging clauses to allow a caveat to be lodged on real estate and PPSR clauses, and
- the need for a Director’s Guarantee clause.
Reward prompt payment.
If there is a late payment charge, you can entice your customers to pay on time or even earlier with an early payment discount. While it may seem that you are losing money when you offer a discount, early payment will at least guarantee that you won’t lack cash for your business operations. Customers are also more likely to do business with you again because of your early payment discount as this can also help them save costs.
Dealing with late payments is a headache and has serious repercussions, including lack of adequate cash flow, especially to small businesses. Without adequate cash flow, small businesses will have difficulty running their day-to-day operations, can barely make investments to improve their operations, and may even lead to business failures.
To ensure your customers pay on time, implement our four tips and your business will never have to worry about late payments again.
Liam White joined the Slater Byrne Recoveries team in early 2013. He has worked across the credit & dispute resolution industry for a number of years. He is currently National Head of Sales at Slater Byrne Recoveries.