Xero’s Small Business Insights from September this year found nearly half of all payments made to small businesses are paid late. In Australia alone, this is costing small businesses $1.1 billion every year.
The report found a relationship between being paid late and experiencing greater cash flow stress.
Daniel Riley, a finance expert and CEO of business finance provider Earlypay, agrees. Poor cash flow is often not a symptom of lack of sales, but a result of poor debtor management, he says.
Riley is encouraging businesses to review their debtor payment systems and put in place measures to speed up the payment of outstanding invoices.
“Many businesses fail due to cashflow issues because they have not put systems in place to properly manage the fast payment of customer invoices,” he says.
“With businesses under pressure due to inflation, rising costs and labour shortages, cash flow is becoming a bigger issue and is sending many businesses to the wall.
“While bigger businesses have the capacity to soak up these late payments, small businesses with lower cashflow do not. Small to medium size businesses urgently need to act to improve their systems and put new measures in place to claw back late payments.”
With that in mind, Riley has outlined some tips on how to get payments in the door faster.
Review the late payments
“Business owners need to take immediate action and review all late payments over a six- to 12-month period,” Riley says.
“Understand which businesses are paying late, by how much time and why. Once you have this information in front of you, you are then able to determine how to respond.”
Adjust invoice dates and payment modes
“Where necessary, adjust invoicing dates for customers,” Riley adds.
“This is important and ensures that payment timelines are adjusted to tighten the period in which customers must pay their bills. Actions can include invoicing certain customers earlier, allowing more time to pay, or reducing the amount of time they are given to pay.
“If some customers have been working on 14-day payment terms and are regularly late to pay their invoices, reduce the payment period to seven days.
“Add additional payment modes to reduce the ability for customers to delay payment due to bank transfers and other issues. The more payment modes, the easier it is for them to pay.”
Set up automatic reminders
“Systems such as Xero enable you to set up automatic reminders when invoices become overdue,” Riley explains.
“Utilise these features to automatically do the work for you. This will prompt customers and should help to get payments in the door faster.”
Add late payment fees
“While not a popular feature of debtor management, it is an effective one,” Riley says.
“Late payment fees usually encourage customers to pay on time or reduce the number of days they pay late. Sliding scales of late payment fees are also helpful in incentivising fast payment.”
Outsource debtor management
“Debtor management is a time-intensive activity and one that needs to be undertaken with care and courtesy,” Riley says.
“Invoice Finance is one of the fastest growing finance products in the country because it provides upfront payments to businesses for the invoices they generate and can hand over debtor management to the financial organisation, in some cases. The cost is also negligible.”
COVID-19 has created an extraordinary and unusual set of trading circumstances for businesses. According to Riley, it will be the businesses that act quickly to address late invoice payment issues that maintain a healthy cash flow and succeed over the next 24 months. This could also be key to preparing for the next black swan event.
