SMEs have been told that times of uncertainty in the economy make it “a must” to adopt more careful cash flow practices in order to protect money coming into and going out from the company.
Direct Debit payments specialists London & Zurich suggested a more careful cash flow approach in uncertain economies as part of a recent blog post by sales manager Sam Pollard.
“With the country having spent the previous few years dealing with the fallout of the 2008 financial crisis and the government’s ensuing austerity agenda, 2016’s EU membership referendum moved the nation – and its economy – into a whole new period of uncertainty,” the article observes.
It continues: “While large businesses are more likely to have the resources and capital to see them through times of economic instability, SMEs don’t always have that luxury. For small and medium-sized businesses, protecting your cash flow is a must in times of uncertainty.”
Understandably, London & Zurich suggest Direct Debit payments as the solution to cash flow concerns, as they allow the supplier to specify payment dates and amounts; however, these are only a sensible option for long-term arrangements, and some customers might be unwilling to sign over such control.
Although Direct Debit payments may therefore be the solution for some, we would always recommend a more widespread approach to improving your credit control from the outset – and not necessarily waiting until the first payment is due.
Careful credit control
Direct Debit payments can help to protect you against customers who deliberately pay late – but what about customers who are unable to pay? It’s important to know whether a client is creditworthy, before you even consider supplying them with goods or services for payment at a later date.
Careful credit control procedures start with background credit checks on new customers: you might check everyone over a certain order value, or you could choose to make it routine to credit check all customers who are not going to pay upfront.
A credit check doesn’t just give you a yes/no assessment of whether or not you should supply to the customer; instead, it will give you a numerical value for the individual or company’s credit rating, complete with a recommended credit limit.
This allows you, for example, to request faster or more regular payments from customers whose credit rating is not so good, so that you do not expose your own company’s cash flow to excessive risk of non-payment or late payment.
It’s a first step towards careful credit control that you can’t get just by choosing a specific method of payment, and it naturally gives you the edge over competitors who don’t credit check their new customers, and who are therefore likely to face late payment, under-payment or outright non-payment on a more regular basis.
Prompt payments mean better cash flow
When you carry out work for a client, regardless of the payment method you expect them to use, make sure you invoice promptly and encourage them to pay in full as quickly as possible – it might even be worth offering a very small discount on invoices settled within a matter of days.
Incentives should not cost you a lot, but any well-run customer’s business will recognise the long-term benefits of prompt payment if they can get a small discount month after month, or even just as a one-off, as small savings can soon add up to protect their own cash flow.
Ask yourself whether it’s preferable to receive 100% of the invoice amount in 30 days’ time – at the risk of the payment going overdue – or to offer, for example, a discount of around 1.5-2.5% for payment within seven days.
Significantly, every prompt payment you receive relieves some of the burden of outstanding invoices to keep track of, allowing you to focus your efforts more closely on encouraging payment of the remaining amounts, and making it easier to see when an invoice has gone unpaid beyond the deadline.
What to do about late payments?
Just because you’re an SME, it doesn’t mean you have to accept overdue payments. All too often, big customers will refuse to even process an invoice until it suits their own finance team, and late payments are par for the course when the deadline doesn’t even get looked at.
Although this is not great for your company cash flow, it is still preferable to customers who do not pay at all, and of course there is the option of setting up a standing order for recurring payments of the same amount, without the need for a formal Direct Debit mandate – just be sure to check the standing order hasn’t been cancelled without notice in future months.
SMEs are increasingly able to accept card payments, using online processing services or PDQ card devices supplied as part of their business banking contract, and this can be beneficial if your customers prefer to be able to pay in this way; online banking has made electronic funds transfers an option at almost any time of day or night too, including weekends, although of course payments might not be processed instantly outside of normal banking hours.
And while cheques are a declining method of paying invoices, they are still used – so if somebody pays you with one, make sure you get the money into your account as soon as possible, and chase them up if the cheque bounces, as they often do.
If the customer will not pay
If late payment turns into non-payment and you do not believe the customer has any intention of settling their debt, there are a few things you should do – including as a priority, cutting off any further work for that client until you receive at least partial payment of what they owe.
Make sure you have clear payment terms and conditions agreed from the outset that allow you to cease supply in the event of non-payment, as there are plenty of scare stories around in which suppliers found themselves contracted into sending goods or services to a non-paying customer, even though they had not received payment for their previous invoice.
And if all else fails, refer the invoice to a debt recovery agent who can start formal proceedings to get your money back; this does not have to mean going to court, as there are plenty of other options to try first, but a small claims court case is still there as a last resort if you think a judge will be able to force the debtor to pay you.
Ultimately though, good credit control procedures will help to manage your credit risk, issue invoices more promptly when the work is done, and collect payments on time more often, so that your company cash flow is in the best possible position to weather any economic storms that might come your way.