It’s easy to fall into a situation where we let late payments slide, often because we’re so busy doing the business and that feels more important. But keeping an eye on money owed and money coming in is vital if you’re to stay on top of cash flow so your business can survive. Tax consultant and business advisor Faye Watts of FUSE Accountants LLP takes a look at how you can successfully manage debt owed to you.
In any business, debtor management is as important a task as any. Likewise knowing when your creditors want to be paid, is equally important to maintain good business relations. My best piece of business advice for debtor management is to first recognise the importance of being a good customer. You’ve requested goods or service so you should expect to pay for them within the requested payment time frame. When you’re a good customer, you’ll recognise why you should expect your clients to be good customers too. More often than not, mind-set is as important as your system. Get this right and you have a head start.
Take a good, long look at how much money is owed to you, and how much effort is being made to chase it up. Work out how old the average debt is. Go one step further and calculate how much time you’re losing chasing old debtors that could be spent on other billable work. It is your right to be paid for your invoice, so don’t feel ashamed of asking for payment on time. If you use a bookkeeping software, ensure you run a regular debtors report and face up to this task. It is fundamental to running your business so don’t shy away.
A business that has little boundaries and systems around being paid can actually look unprofessional and ultimately, your clients may even start to see you as such. They may feel that they can start to let things slide, as you obviously do. If chasing money owed to you is not your thing, outsource this to someone who can be accountable for ensuring your customers do pay on time. When this is a designated role, it can become a smooth process and appears more professional too.
Invoice for the work when you’ve just done the work…at the latest. You want your good job to be utmost in their minds and for the feel good factor to work its influence. You’ve solved their problem and they should be happy to pay. If you leave invoicing or chasing them for a few months, that feel good factor has gone and they are onto new things (and new suppliers who may be hotter than you in chasing the money). They may even have forgotten the quality of the work, or, insist they have already paid when they haven’t, just because it was left so long. If they’re currently strapped for cash, they may even blame your laxness for putting them in this position.
When you start work with a new client, point out your terms and conditions. This is how you get paid, and when. They then have no excuse and can’t say they didn’t know. Decide what your payment terms are and stick to them. You can always use your discretion in special circumstances but the key is that you have assurance in your payment terms and you make this clear. Some companies will dictate their payment terms on you and you may have no alternative to this so be prepared for any cash flow disadvantage this could create.
Things get messy and chaotic when there is no one with obvious responsibility for chasing money owed. Allocating this job to a specific person who then owns it is a vital step in taking this seriously. Don’t think you have to choose the most bolshie person in the office for this either. The best approach is sometimes one of charm and tact, coupled with persistence and the ability to spot if someone is trying to pull the wool over your eyes. You can even go to a third party provider to do your chasing for you if you don’t have anyone suitable in-house. Create a workable system to be followed and ensure it is.
We operate a system where all our clients are graded on the amount of work they bring us, plus how smoothly they pay their bills. Someone who does a lot of work with us, and pays on time, is a 1/1, whilst someone who does a small amount and is a pain to chase may become a 5/5. Stick to your guns and choose your clients wisely.
If a client says they will pay this week, ask them when. If that cash isn’t in the bank when they say, follow it up. Become efficient and effective and make them accountable. Make sure they commit to making payment by a specific date, and hold them to this.
If someone suddenly becomes unavailable, and doesn’t return your calls or emails, cut them loose from your system and move them into the next stage. Stop all work, if you are still doing any. This next stage could be a solicitor’s letter or debt collection agency. If people go quiet on you it’s often for a reason, and not a good one. Keep the dialogue going.
Look at how long it takes you to currently get paid and aim to reduce that. Set a target of improving turnaround time on invoices from 50% paid on time to say 75%. Sometimes we set financial turnover goals which are often not in our control. Invoicing on time and decreasing turnaround time, however, is.
There may be bad payers that you actually enjoy working with, or that bring in a large amount and do pay…eventually. Explain that you’re changing your systems and in future they need to pay upfront, or instalments via Direct Debit. If they like you too and the work you do, they will make an effort. Late payers will very often repeat offend so create a benchmark of what you are willing to accept and eliminate working with bad paying clients or request payment up front.
By not invoicing on time and being paid whilst the iron is hot, you could miss out on the chance to generate further sales with that client and lose a potential marketing opportunity. Also, by not pursuing your debts on time, the business could suffer, you could lose customer morale when you eventually chase payment and you have less cash to pay yourself and others. The longer pursuance is left the more likely you may not get paid at all. Make this your number one priority to get right.
Author: Faye Watts who is no ordinary tax accountant and business advisor. Her background in a creative environment and seven years as a freelancer in the fitness industry, followed by running her own accountancy practice since 2008 means that she has a real life understanding of the pressures of running and growing a business. As well as her work in tax consultancy and business planning, Faye sits on the advisory boards of a number of organisations.
fayewatts.com and www.fuseaccountants.co.uk