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Late payments crippling small and medium firms

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Thursday November 10, 2011 at 9:00am

I read recently that late payments to small businesses exceed £33 billion. And more often than not it's large businesses who are failing to pay up on time.

Bacs (Bankers’ Automated Clearing Services) say that around 860,000 companies are experiencing late payments with each SME on average owed £39,000 and left waiting two months to get it.

With bank lending at an all time low in my opinion there’s little hope of overdraft or loan facilities to fund this shortfall. This makes it all the more important to keep on top of cash flow and have sound financial management within your business.

If, as I blogged a few weeks ago, Cash is King I think it’s fair to say that a good credit control procedure is Queen. Effective credit control starts before you even take on a customer. Consider the following point. Do they form part of your procedure for taking on a new customer?

  • Invoices are payable immediately. It is a common fallacy that invoices are payable after 30 days or “at the end of the month following receipt”. Ensure that your terms of business clearly state that invoices are payable immediately and, as a courtesy, you may wish to accept 30 days credit but that is not documented in your terms of business.
  • Check the credit status of your potential customer. Use a credit checking agency to ensure that your potential customer is not already showing signs of becoming a bad debt for your business.
  • Determine the credit limits. So that you do not over-expose your business to a potentially large bad debt, determine what level of credit you are willing to give each potential customer and document this into your sales ledger. You may wish to increase this as your customer proves they are paying your invoices promptly.
  • Consider cash up front. Is it possible to take some or all of the payment on account before you start the work or supply the goods? IT services are often charged in this way, can you apply the principle to your business, especially when supplying to big businesses? Try it, you might be surprised.
  • Make it easy to pay. All invoices should have your bank sort code and bank account details in the event that your customer wants to transfer money directly, rather than send a cheque. If you are able to take payment online and by credit card you’d be surprised how this can significantly improve your cash flow position.

Your accountants will be able to advise you on how you can improve your credit control procedures and get more cash flowing. Let’s hope tighter controls and better procedures can see that figure of £33 billion drop dramatically.

Andy Parker
Chartered Accountant Birmingham

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