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Slow payment is major issue for small business.
Research shows that British SMEs are having to wait an average of 41 days longer than their original agreed payment terms before invoices are paid. (source: BACS)
To get paid faster why not include a pay now button on your invoice
For many businesses the last few years have been really tough – and the next couple may be just as challenging. Although we are, in theory, out of recession the financial difficulties which come from an economic downturn will continue to be felt way into the future.
If you own a service business there are things you can do to make yourself as resilient as possible and I include my take on the most important ones below:
In a service company the level of customer spend can be quite high. For this reason it is vital that you review the level of credit you are prepared to give clients and stick to it. My payment terms require that clients pay either by monthly standing order or on date of invoice. Even if they don’t pay immediately at least I can chase from the earliest possible point.
Ensure you invoice promptly after work is completed, and, if the job spans several months, agree stage payments with your client so they don’t owe you more than 1 months worth of work.
Bare in mind that none of us really knows what is going on in another company. A seemingly sound company can be on the verge of collapse due to cash flow problems. Credit checking services can help you assess the credit worthiness of a business, but remember their information is out of date to some degree and they don’t pick up the full picture. The only way to ensure you don’t get caught out is to collect the money owed to you as quickly as possible.
Remember, even the banks are reluctant to be banks at the moment – so don’t fall into the trap of acting like one!
A key way to survive the recession is to provide the BEST service you can and be as close to your customers as possible. I see many service providers who think they can get away with average service and who assume clients will stick with them regardless. This is an arrogant assumption which will lead them, quite rightly, to lose good clients to much more customer orientated businesses.
For any business, but particularly for service companies, the relationship you have with your clients is king. A client who knows you well, and believes you are giving him the best, most focussed service available, is unlikely to shop elsewhere, even if he has the possibility of getting the service ‘cheaper’.
Build your referral network
We all know that people buy from people. You are much more likely to engage a supplier who has been recommended to you by a trusted advisor/contact than one you have met fleetingly at a networking event.
For this reason I think it is important to build up a network of people around you who:
– although they are not competitors to you, have the same types of customers as you do.
– understand exactly who an ideal client is for you so they can spot one when they meet them
– understand exactly what you do and the problems you solve for your clients
– are people you would be happy to refer to your contacts so the relationship is mutually rewarding
If you have a strong network you can be much more focussed in your marketing and will be much more likely to get the type of new clients you need.
At the end of the day those businesses which will remain standing will be stronger than they were before the recession, because they will have grasped exactly what makes a great business. The prize for getting it right is not only survival, but the opportunity to achieve great heights once business becomes easier again.
Yes of course they would, silly question, everyone wants to be paid faster but how can it be done?
Santander may have the answer, they are offering a facility to SME’s called Supplier Payments and its part of the Funding for Lending Scheme.
Supply Chain Finance has been around for a while, this an extract from an article in the Telegraph in October 2012
Supply-chain finance, which is sometimes known as “reverse factoring”, allows big businesses to notify a bank as soon as a supplier’s invoice has been approved. The bank, armed with the assurance the bill will be paid, will then extend a full, immediate advance of the bill to the supplier at a low interest rate.
The Prime Minister hailed the technique as “win-win” because large companies get greater protection from small suppliers going bust, while the small business avoids having to wait for payment and, since the invoice is approved, avoids any risk of non-payment.
Most of the main banks have solutions for large businesses but it isn’t normally available to SME’s.
Is this an option for your suppliers?
I think e commerce and EDI has focused too much on billing clients and consumers (mainly B2C rather that B2B) and not enough on improving the efficiency of processing supplier invoices.
According to research and analysis group, Gartner, typically the cost of processing an invoice in the UK averages between £4 and £25, and in some cases even up to £50, per individual invoice.
You can check the costs for yourself using pay streams calculator.
A typical purchase invoice goes though these stages:
- Its checked against the purchase order
- Its entered as unauthorised to the accounting system
- Its copied and sent to the manager to check the goods were received and were in good order
- The manager signs the invoice off
- Its status is changed to approved or in query
- Queries are sent to the supplier
- Authorised invoices are scheduled for payment
- Payment is made with a remittance advice
- Supplier statements are reconciled to the accounts system
The more suppliers you have and the bigger the volume of either invoices or transactions on invoices, the more complicated and long winded the process becomes.
Although all invoices contain the same basic information they are all formatted and laid out differently.
In some systems invoices are scanned and given a bar code to help index them to accounting system entries.
But it seems to me that many businesses have overlooked what should be a simple solution, Self Billing.
With Self Billing you generate the tax invoice for your supplier and send it to them with the payment.
The following is an extract from HMRC Self-billing:
Putting in place a self-billing arrangement with your suppliers can bring certain advantages for your business:
- it can save time and money – you can send self-billed invoices electronically so long as you can set up suitable systems
- purchase invoices are produced to a standard format, making life easier for your accounts department
- you retain control of how much you’re invoiced for – this can be helpful if your business is responsible for determining the value of the goods or services it receives
- flexibility – you can outsource the production of the self-billing invoices to a third party if you want to
Your suppliers don’t have to be based just in the UK. You can self-bill businesses in other EU countries or in countries outside the EU.
Advantages for suppliers
If you’re a supplier, entering into a self-billing agreement with your customers can be helpful for your business because:
- your customer is responsible for making sure that the VAT details on the invoices are correct
- as part of the agreement with your customer you may be able to specify when you’ll receive payment – this can help with your cash flow
Self billing has been used by the Construction Industry for many years, in fact I created a Self billing system when I worked at Rollalong in 1994, the key issues are:
- Getting suppliers to agree to join the self billing scheme
- Getting approval from HMRC
- Keeping your VAT registration records up to date
But the cost and time savings are significant, the whole process changes and could become:
- Purchase Order Sent
- Goods received and matched my the manager
- Value of Goods received entered to accounting system – this could be automated on matching
- Payment made and remittance changed to Self billing invoice
The number of queries are reduced because you aren’t invoiced for things you haven’t had, there is no need to copy and distribute invoices for sign off as this is replaced with stronger goods inward systems.
Why aren’t more businesses adopting self billing?
Cash is king! and managing it properly is one of the best ways of ensuring your business flourishes. However, many small business owners find it a real challenge to chase customers who are late paying – even though not doing so leaves them in a really tight situation with the bank.
A phrase we hear often is, “They’re a really good customer, so I don’t want to annoy them by chasing for payment”. Let’s just analyse that sentence for a minute. Why are these customers good for your business? Because they allow you to do lots of work for free? Surely, a good customer is one who appreciates your efforts and is happy to pay because they value you. If you have done the work you agreed with your customer, to the level they expected, why should they not pay the agreed price in the agreed time period?
So don’t be shy about collecting YOUR money.
Other problems we see regularly are:
– Not setting payment terms up front
If you have not agreed when the customer should pay BEFORE the work is done, you will struggle to collect the money in a reasonable time frame. Make sure your terms of engagement/purchase confirmation clearly state when you expect to be paid.
– Setting unnecessarily long payment terms
Don’t assume that you have to offer customers 30 or 60 day payment terms. Start from a position of offering zero payment terms and only offer extended terms if there is a commercial advantage in doing so. Bear in mind that even if you offer 30 day terms you will most probably be paid later than that. As you don’t know the financial position of all your customers the only safe money is the money in your bank account.
– Not sending invoices out promptly
If you do not send out your invoices as soon as the work is complete, you automatically build a lag before you receive payment. Invoicing is a chore, but regular invoicing is vital to achieving financial stability.
The most common reason small businesses fail is because they run out of cash.
The most common reason they run out of cash is because they do not collect the money they are owed quickly enough, or allow debts to go bad.
Make sure you business succeeds by being cash collection savvy.
Late payment kills businesses, it’s a fact.
Latest research shows that British SMEs are having to wait an average of 41 days longer than their original agreed payment terms before invoices are paid. (source: BACS)
So what can you do to get paid faster?
- Get payment upfront – It might sound obvious but do you ask for payment with order? or deposits? or to be paid on delivery?
- Get Stage Payments – on projects agree stages and collect payment before you do the next stage
- Raise the Invoice quickly – as soon as you can bill the client send out the invoice
- Agree Terms of Business and Payment Terms before you start any work
- Make sure you know who to bill and who to chase for payment
- Make your invoice stand out, use bright colours and send a copy by Post and E Mail
- Offer multiple payment methods – Credit Card, BACS, Cheques, PayPal – make it easy for your client to pay you
- Offer a discount for prompt payment
- Charge interest for late payment
- Deal with any disputes quickly