10 Steps To Making Sure You Get Paid
The Institute of Credit Management (ICM) has rated outstanding payment periods to small to medium enterprises (SMEs) as red, amber or green. Bills outstanding for 75 days and over are ranked as red, 50 to 75 days as amber and fewer than 50 days as green. Paul Keeling, partner and Head of the Litigation and Dispute Resolution team at Stones Solicitors LLP, looks at how SMEs can avoid some of the pitfalls.
Research from the ICM showed that 61 per cent of SMEs were in the red, 28 per cent were amber and just 11 per cent green.
When economic conditions get tough, one of the first problems faced by businesses is increasingly late payment from their customers. As businesses try to stretch their cash flow, so some payments are delayed.
There are many reasons why SMEs fail, but the one factor that appears time and time again is the problem caused by customers who pay late.
The latest figures show that over half of failures in SMEs within their first three years can be attributed to cash flow problems. There is a real worry that, as payment figures fail to improve, this figure could rise again.
The Federation of Small Businesses has gathered evidence that larger businesses are ‘bullying’ smaller ones into accepting extended payment terms of between 60 and 120 days, often by threatening to withdraw contracts if this is not agreed. In some instances larger businesses are being bullied themselves, with an alarming number of public sector and large commercial purchasers of services and equipment not only extending credit periods, but also asking for credit notes representing significant discounts off any invoices issued over the previous year.
There appears to be little evidence that small firms are exercising their right to charge clients interest on late bills or claiming compensation for the cost of recovering debts owed to them. One reason for this is that small businesses are not prepared to jeopardise their relationships with important clients by being heavy-handed.
The best advice to owner managers is not to rely on legislation for protection (this should be the last resort), nor wait for customers to change their attitudes. Small businesses need to be as proficient as larger companies in imposing payment terms, making invoices and pursuing money owed to them.
The answer is procedure, but it does not have to be complicated or costly. It is easy to check a customer’s record so that notorious late payers can be avoided. A credit report on a company can cost as little as £10. Payment terms should be highlighted in a contract and discussed before work begins.
Invoices should be accurate, prompt and clear. Managers should find out who is responsible for paying the bills so that they can check that the invoice has arrived, that the client is happy with it and to confirm the payment date.
There are 10 simple steps to help towards better payment records:
− Check the creditworthiness of new customers before drawing up contracts
− Refuse orders, or get payment in advance, if a customer has a poor record
− Set, and stick to, strict credit limits
− Agree with your customers unambiguous written terms and conditions of trading
− Involve the sales force in negotiating payment terms to ensure that these are understood from the outset
− Make sure you know and comply with procedures used by your customers
− Maintain close contact with the individuals who are responsible for paying your account so that, even when money is tight, you are at the top of the list of suppliers to be paid
− Ensure that all dispatch notes and invoices are accurate and are presented on time
− Tell customers you will charge interest on late payments
− Call your customer on the agreed payment date and ensure your invoice is on the payment list.
Paul Keeling can be contacted at Stones Solicitors LLP on 01392 666777 or at paulkeeling@stones-solicitors.co.uk. More information is available by logging on at www.stones-solicitors.co.uk.