How late payment affects the cash-flow of your business

As most business owners and CFOs know, cash flow is the life blood of a business. Without cash flow a business will cease to exist. It is therefore important for all businesses, large and small, to manage their cash-flow effectively. One common threat to cash flow that many credit controllers will recognize is late payments, which can do significant harm to a business. Here, we look at why cash flow is important and how cutting down on late payments can help improve things.

Why cashflow is important?

Research conducted by American Express reveals that one third of small firms that have missed a payment deadline, have subsequently had suppliers withhold goods or services. Additionally, 28% have had their relationship with suppliers tested because of cash flow issues, while 35% have had to cough up additional late payment fees for missing deadlines. This shows the implications of not being able to control the flow of money within a business and the dangers of business failure due to late payments. Additionally, having certainty in your cash flow can mean greater overall certainty in your business, providing for example the confidence to make purchases quickly without having to wait.

What late payment can do to cashflow

Late payments can lead to massive amounts of resources being eaten up to pursue debts, both financially and in terms of time spent by credit controllers. SMEs tend to struggle the most as they may not have credit controllers in place to chase invoices that are pending. At the beginning of 2018, B2B invoice provider MarketInvoice revealed statistics showing that 62 per cent of invoices issued by UK SMEs in 2017 (worth over £21 billion) were paid late.

Late payment could affect the expenses companies usually have such as staff salaries, supplies, rent and expenses for operations. Cash flow is very important, especially when coming up to hard months where cash is tight or when a crisis happens. Having late payments could leave you dipping into your reserves instead of using them to invest in business growth.

For companies seeking to manage their cash flow more effectively, we offer the following four pieces of advice:  

1. Ask for up-front payment
This is particularly useful for service based companies as it can ease the anxiety of doing work for a client that you think has the potential to not pay at the end of their customer cycle. It is not always recommended to approach matters in this way, but in certain instances it can be useful when apprehensions about certain clients present themselves.

2. Credit checks for clients
This is a great way to obtain a forecast on whether a client is a good payer or not. Credit controllers use tools like Experian Business as an effective way to monitor clients and reduce the risk of bad debt. This minimises the risk of taking on late payers who could jeopardise cash flow.

3. Set firm late payment penalties
A strong late payments strategy can be effective in maintaining cash flow by ensuring that clients pay on time so as to avoid additional charges if they do not meet deadlines.

4. Outsource late invoices to a debt recovery firm
By outsourcing your debt recovery to a third party, you can preserve the trading relationship with your clients and have a peace of mind that your invoices are being recovered on time. This also saves time and has been proven to be very cost effective compared to assigning it to a credit controller.

Debt collection solicitors can send a Letter Before Action (LBA), which is a letter that requests payment within 7 days before court action is taken and warns of the imminent issue of a court claim. Our research shows that the LBA is successful in securing payment in 86% of cases, and in the remaining instances legal options are available.