Finola McManus, chartered accountant and managing director of business development firm Practice Perfect, explains how businesses can ensure they are paid promptly and keep their cash flow consistent.

Small businesses are often flattered when they get awarded new sales from big businesses or well-known ‘brand’ names. The assumption is that the bigger the customer, the more reliable they will be for payment and the lower the risk of bad debt. Sadly, this is not always the case.

A customer who consistently pays late – particularly a large client – can cause no end of cash flow problems for small businesses. Here’s how you can deal with this situation and ensure that you get paid on time, every time.

The big spender dilemma

We’ll start with an example. Business A is a small, family-owned business in the electrical contracting sector. It’s managed to get onto a large firm’s tender list and won new sales. Its turnover looked great, as did the profit margins. The company was growing fast.

Despite have strong accounting records and accounting controls, the new customer was slow in paying, often taking 90 to 120 days to pay. It would then pay ‘on account’ and only pay what it wanted to, with little regard for invoices raised.

In the meantime, Business A had increased its payroll cost to service the new turnover. It was also funding materials to service the new sales and these had to be paid for in normal 30-day credit terms, or deliveries would be stopped.

Before long, Business A was exceeding its overdraft facility with the bank, losing trade discounts and credit terms with suppliers and struggling to pay its VAT and PAYE liabilities ongoing. This was not a good place to be, and seriously impacted its ability to trade.

Fixing the problem

The following solutions were put in place, and it took six months for Business A to trade through the cash flow problem.

• The directors of Business A had to inject their own personal monies to bridge the funding gap.
• A full-time credit controller was appointed.
• The Aged Debtors report (a report which details how much money the company was owed over a certain period) was updated daily, and customers were emailed, telephoned and even visited personally to ensure promises about payment were kept.
• The directors of Business A met with the larger customers’ accounts managers and agreed new terms in writing. For a small early settlement discount, the larger customers (most, but not all) agreed to pay within 30 days of invoice.
• Business A then tightened up its own internal control systems to ensure invoices were raised promptly, and proper references were printed on those invoices, together with details of who approved the payment of that invoice at the customer’s end. This ensured the invoice got to the right person and there was an easy way to follow it up with a point of contact.
• Business A ultimately decided not to do business with some larger firms who continued to be slow payers over 90 days. The reduction in turnover and profit was deemed preferable to being at risk of ceasing to trade due to lack of cash.

Top tips

Regardless of what industry you’re in, there are things you can do to protect yourself from late payers:

• Improve your own accounting systems and controls. Ensure your data is accurate and up to date.
  
  
• Make sure there is never an issue over the quality of your product or work and that you deal with customer complaints immediately – don’t give them any excuse not to pay.
  
  
• Set cash collection targets and share them with your staff. Consider rewards for exceeding targets.
  
  
• Great credit controllers create telephone relationships with customers and their accounts payable departments. They are comfortable with calling daily if necessary and talk with a smile in their voice. They follow up with calls to ensure customers keep their word and call to say ‘thank you’ when invoices are paid on time and as agreed.
  
  
• Early settlement discounts can work in some cases, but beware customers who don’t end up taking the discount and still paying late.
  
  
• Be very clear from the outset and have an agreement in writing, setting out what you are selling/providing, what the price will be and when the invoice will be raised and due for payment. Accountants do this themselves with their own clients, and call it a ‘Fixed Priced Agreement’.
  
  
• If your line of business allows, consider talking to customers about paying a regular monthly amount on account or by standing order. This will help their cash flow too. Reconcile every quarter at least.
  
  
• Put clients or customers on ‘stop’ if they do not pay. Why continue to deal with a customer if they haven’t paid for what they’ve already received?
  
  
• Ask yourself and the customer: can a direct debit be set up to settle invoices when due? Offer the customer an incentive to do this – preferential rates, terms, discounts etc.
  
  
• Have a good solicitor on hand. Have clear and consistent policies about at what stage the customer will receive a ‘seven-day notice before legal proceedings’ and then act on your threat every time. Be consistent. As long as you have given the customer every opportunity to pay, it is their problem and not yours if legal proceedings are started.
  
  
• Often it is a case of ‘he who shouts loudest goes to the top of the list’. Make sure you’re up there!

The golden rule is to be consistent and persistent. If you are, customers will know what to expect and will be more likely to comply.

Have your say

Do you have customers who continually pay late? If so, how do you deal with the situation? What advice would you give to other businesses struggling with the same issue?