Every business has the right to expect prompt payment for services rendered. Ensuring that all moneys owed arrive on time and in full should be the responsibility of the client or customer. In an ideal world, this blog wouldn’t exist.
Unfortunately, according to new research from Xero, South Africa’s SMEs spend 1.3 days a month pursuing delinquent invoices. That’s 1.3 days too many, and in certain sectors and regions it’s even worse. Healthcare businesses spend 2.6 days a month chasing clients, and for businesses based in Port Elizabeth that figure is 1.5.
These lost days are having an impact. Xero’s research also reveals that late payments are the biggest financial challenge for half of South Africa’s SMEs. And a hefty 48% are worried about overdue invoices and cash flow.
But why are late payments such a problem — and what can your business do about them?
Why customers pay late
Late payments cause cash flow issues for 32% of South Africa’s SMEs, but their impact isn’t exclusively financial; 18% of respondents blame them for reduced morale, and 16% believe they result in lost productivity.
The reasons behind these financial frustrations are illuminating. For some business owners it can be a self-perpetuating phenomenon, with 24% believing that late-paying customers are themselves waiting for payment.
Of course, this isn’t the only reason: 23% believe that customers are disorganised and struggle to track their payables. Another 23% believe that customers have set their own internal payment terms for invoices — regardless of supplier terms.
Whatever the reason, late payments can be lethal for a small business. It damages the stability of your finances and stifles your company’s growth plans. That said, you can take certain steps to address the issue.
Set your terms
An obvious one is to set realistic, cash flow-friendly credit terms. If you have to pay a supplier’s invoice in 30 days, but provide 60 day payment periods to your customers, you’ve created an immediate financial gap for your company. Make sure your payment terms are set up to avoid problems.
If customers consistently pay late, shorten the payment period on any invoices you issue — even to one or two weeks. Even if customers still pay a week or two late, you’ll have more breathing room than you would have otherwise.
Manage and nurture your financial relationships with customers. Technology can automate this process and remind them to pay on time with an SMS or email. Xero’s cloud accounting software also lets you include a ‘Pay Now’ button alongside any invoice you issue. Making contact with their accounts department can also help, as a friendly relationship with a customer’s finance team can make a significant difference.
Finally, make sure to keep track of what you’re owed. If you’ve spent time or used resources on a client’s project, make a note and be sure to bill them for it. If you’re struggling to remember the details at a later date, it’s harder to issue an accurate invoice — and the customer may not trust your recollection. It’s essential to establish an efficient invoicing process if you want to avoid extra hassle and cash flow complications. Ensure you invoice promptly to ensure quick payment. Automated invoice reminders, another feature in Xero, are a useful tool to help you stay on top of your invoices, save time and get paid faster.
Pursuing late payments can be awkward, but it’s essential to preventing late payments in the future. Most customers may pay late due to adverse circumstances or short-term difficulties, but others will take a willingness to accept late payments as a willingness to accept non-payment.
Be polite, but firm, stick to your guns and you’ll minimise the effect of late payments on your business.
Agree all this. We love the email reminders in Xero along with those offered by paid service providers. We also know though that single most effective way to improve debtor metrics is to start telephoning slow payers and explaining (politely) your terms of trade and your payment options. If you don’t have time to do this or prefer to use your time elsewhere in your business consider a managed service option like smartAR to do it for you.