Today's challenging climate means that many businesses are struggling to pay their suppliers on time, if at all. This is resulting in an increase in the late payment culture and bad debt in the UK and unfortunately, as this becomes more commonplace, the probability your business will encounter the knock-on effects is considerable.
Small firms are being forced to write off tens of thousands of pounds worth of bad debt every year and this figure continues to grow, especially under the current economic climate. Late or non-payment has a detrimental effect on cashflow and necessitates an increase in turnover in order to be able to achieve adequate profits to compensate for losses incurred.
Even more worryingly, if a proportionally large debt turns delinquent, it could have devastating consequences, bringing a business to its knees and even forcing the supplier to cease trading.
There are, however, some simple measures your business can employ to assist in managing this risk to reduce your bad debt exposure:
Know your customers
Avoid risks when supplying to new customers by running a
credit check. Companies House and other similar entities are able to provide a
risk status report for a minimal cost.
Always request the customer's business address, rather than registered office or home address, and a landline phone number. This information can be used to track down individuals, even if they have closed their PO Box or changed their address and phone number
Ongoing reviews
Credit ratings do vary from time to time and a well rated
customer today could potentially be a bad debt in the future. If a customer
begins to struggle, their payment to you could be affected. Keep up-to-date with
any changes in your client's financial health by checking their rating
regularly. Some online credit checking suppliers are able to offer you a
monitoring service so that you are automatically advised if a client's rating
worsens
Better payment terms
Terms and conditions should be put in place to protect your
rights and provide you with security. These need to be set out at the beginning
of a relationship with a new customer and followed up with written
confirmation. They should be reinforced in all documentation and correspondence
with the customer
Get with the times
Make it easy for your customers to see the payment methods
available on the invoice, statements and any letters you send. Clarify the
address to which cheques should be sent. Even better, if you ensure your
customers have your bank details and request that they pay electronically, you
will receive the money in your account more promptly and avoid the
administrative headache of banking cheques. Encourage early settlement by
offering discounts for early payment
Demand interest
To deter late-payers, demand interest for overdue accounts.
You are legally entitled to do so. When extending credit, make sure that your
customer's accounts department knows when you expect payment and fully
understands penalties
Be proactive
As soon as the goods have been despatched, call to check
they have been received and are satisfactory. This prevents customers from
delaying and using the excuse that there was a problem with the order when it
comes to time to pay. A polite call or email can often pre-empt a payment
problem. Being proactive will help build relationships with your customers'
accounts department.
Always send invoices out immediately. Make sure the invoice is clearly addressed to ensure it reaches the correct person or department and state the due date. Also be sure to send statements and reminders of payment due dates, as well as scheduling reminder calls to assist in preventing a bad debt
Consider using invoice finance
Services which fall under the invoice finance banner, such
as factoring and invoice discounting, can assist in keeping on top of late
payments. The financier will endeavour to improve your days sales outstanding
and can hard chase clients in cases where you would rather not test your
relationship. In addition, invoice finance boosts cashflow by paying out
typically 90% of invoices as they are raised (some facilities will pay 100% and
above), reducing the impact of late-payers on your daily working capital
What goes around comes around.
Make sure you settle your own invoices on time. If you get a
reputation as a late-payer, word will spread. If all businesses settle accounts
quickly, the economy as a whole will reap the rewards, with positive spin-offs
all round
