11/11/2020 by Pascoe Partners Accountants
You’re a small business owner, not a bank. If your customers are paying you slowly, beyond your usual invoice payment terms, then you’re a bank offering interest-free loans.
Why do I say that?
Because by allowing your customers to routinely pay you late, you’re helping to fund your customers’ purchases, yet you’re not charging any interest for that.
And that’s not really fair, is it? (After all, your bank is charging you!)
You have probably heard the saying, “Cash is King.” This is about the fact you don’t pay your staff and bills with “profit,” you pay them with cash. The paramount importance of cash is heightened even more in difficult economic conditions.
So, what are you doing to collect—on time—what your customers owe you?
Admittedly, slow payers are probably trying to extend payment terms because of the hardship they are facing. But others might just be seeing what you let them get away with. Either way, the health of your business depends on good debtor management practices: In other words, having debtor management procedures and systems in place to make sure your invoices get paid on time.
1. Vet who you are giving credit terms to: Don’t give credit to customers that don’t yet have a proven track record with you of being valuable to your business.
2. Clearly communicate your invoice payment terms: Make sure your customers are aware of your payment terms and be sure to have these displayed prominently on the invoice. Always show a due date for payment—this works better than including words like “Net 7 Days” because that puts the onus on the customer to work out the due date, plus the 7 days is likely to blow out because in three days’ time when they look at the invoice again, they might think, “I have 7 days still to pay that,” which they do not.
3. Call to confirm receipt of each invoice: You have probably heard the old “I didn’t receive the invoice” excuse. One way to avoid this is to telephone the customer a few days after they would have received the invoice. Ask them if they have received the invoice and check with them that everything is okay with their purchase. Thank them in advance for their on-time payment, reminding them of the due date as you do that. Ask them if they’ll have any issue with paying by the due date.
4. Offer customers more ways to pay: While it’s normal to include your business bank account details on the invoice, as payment by electronic funds transfer (EFT) is obviously common, research by software company Xero has shown that offering to take credit card payments generally results in faster payment times. All the banks offer credit card merchant services but most outsource it. Terms vary bank to bank so it is best to do your research to get the most cost-effective provider. There are other options, too, like Square which can be purchased from office equipment suppliers and accounts set up online. Note that while you have the option of passing on credit card merchant charges to your customers, be careful with this as it can cause some friction and defeat the purpose of getting paid sooner. Accept the credit card charges as a cost of doing business and a way of getting paid sooner.
5. Consider early payment discounts: You could test offering discounts for early payment or, conversely, charge interest on late payments and see the effect that has on your debtor days. To charge interest, your credit terms will have to clearly state that when first signing up the customer.
As you can see, getting paid on time is about more than just your invoice payment terms. There are other things you can do to educate, remind and make it easier for your customers to pay you.
Unless you like being a not-for-profit bank, implement these measures and see your cash flow improve.
Remember it’s your money!