Any entrepreneur or small business owner will tell you that cash flow is the lifeblood of their company – young or established – and a business can only stay healthy with cash in the bank.
However, a survey conducted of SME owners in 2012 showed that late payments are crippling small businesses to the tune of £700m a year. What is more, 35 per cent of the owners in the survey said that incurring a late payment of £20,000 would be enough to put them out of business.
Simply put, small businesses must get the money they are owed, and they must get it on time. SMEs currently have to wait on average 43.4 days before an invoice is settled and they spend 14 days a year chasing debt. Time is such a valuable commodity when running a business that it goes without saying that acting as an unpaid debt-collector is a waste of everyone’s time.
While you may feel at the mercy of your debtors as a small business, there is in fact a lot that can be done to help make sure you get paid on time.
Invoicing is one area that you really need to get right to make sure you get paid on time. It is all about making it as easy as you can for your clients to pay you by presenting them with a fast and accurate invoice. You would be amazed the impact a slick and professional looking invoice has on the purse strings. Get it right first time and you are sending a clear message to your debtor that you don’t miss a trick, and you are far more likely to be paid on time.
But the process of getting paid starts even before the invoice goes out – preparation is everything. I believe there are five key stages to getting paid on time, follow these steps and you stand the best chance of getting your money in a timely manner.
Firstly, research your customers before giving credit and look up the company directors on services like Duedil to make sure they are a reliable organisation. With big companies make sure you obtain Purchase Order numbers and then check your invoice has been received safely.
Secondly you must establish the right payment terms with the client when drawing up the initial agreement. When negotiating the deal you should include terms and conditions stipulating date of payment in writing, then you can always point to it later if necessary.
The third stage is arguably the most important – making sure you create an accurate and timely invoice. This is where a proper accounting package could really help. If you use a spreadsheet or desktop application to do your invoicing, then using an online accounting package will be transformational.
Being online means you can invoice from anywhere and from any device, making your accounting process completely portable allowing you to get your invoices out much faster. Illustrating this, a friend of mine with an IT consultancy now gets his team to invoice as soon as the job is finished. His invoices now go out two to three days faster, so he gets paid two to three days sooner.
The fourth stage is to know who owes you. You would be amazed how many small businesses don’t know the status of their unpaid invoices at any one time. A proper accounting package can help you, at the click of a button, keep tabs on any aged receivables you may have (i.e. who owes you how much and how old the debt is). It is worth making life easy for yourself in this way to make sure you never drop the ball and unknowingly let customer’s payment terms slip until it’s too late.
Finally, when it comes to following up – I always recommend using a team member, friend or virtual assistant to make the chasing calls. This makes your company look bigger and protects your relationship with your client.
I think we can all agree that as a small business getting paid takes a lot of effort. But if you follow these five steps, you will give yourself the best chance possible of getting paid on time.
Johnny Martin FCA – is an experienced finance director who now demystifies business for entrepreneurs. He is a partner at the British Library Business & IP Centre, is a panelist for Imperial Business School and financial fitness coach forIntuit UK, makers of QuickBooks accounting software.