How to manage late payments and improve your cash flow

Every small business owner knows how great it feels to get paid for a job well done; each invoice paid is another opportunity to do more of what you love.

So when a client or customer pays late, it can dampen the mood. And this situation is far from uncommon; 87% of businesses are typically paid late, according to accounts receivable software provider Chaser.

With less capital and tighter margins, late payments can significantly impact small business cash flow. In this guide, we’ll talk you through ways to stay on top of late payments and reduce the risk of cash flow issues.

What do late payments mean for small businesses?

Late payments have serious repercussions for small businesses.

Sometimes, a single invoice can be the difference between being able to pay your suppliers and staff or not.

Here are some of the effects late payments could have on your business:

• Inability to pay suppliers and staff
• Limited purchasing power
• Damaged supplier relationships
• Limited operations until payment is made
• Difficulty seeing your true financial picture
• Reduced cash flow

Why is getting paid on time important?

More than half of businesses are spending four or more hours on payment follow-up tasks every single week, according to Chaser’s late payments report.

Getting paid on time means you have more cash for investing, and more time for focusing on what matters in your business. You can pay suppliers and staff on time, fund your operations, and boost your profits.

How do late payments affect cash flow for small businesses?

Cash flow refers to the money that moves in and out of your business. Late payments can push businesses into negative cash flow, where you have more money going out than coming in.

This is especially troubling for small businesses with tighter margins and lower income than large companies. A single unpaid invoice might jeopardise your operations for the rest of the month.

What can small businesses do to protect against late payments?

Paying on time is up to the recipient of the bill or invoice. But there are certain measures you can take to make paying on time easier for them.

Robust relationships with your clients and suppliers can help set the tone for timely payment. The stronger your relationship, the more your client or supplier will want to honour the payment.

Agreeing on payment terms before working with someone is also in your best interest. Will you use a 30-day invoice or a 60-day invoice? Will you bill before or after the work is complete? Confirm the fine details upfront, so everyone knows what’s expected of them.

Embrace technology where possible. Automate invoice reminders using software. People who use Chaser to follow up on their invoices can get paid 54 or more days sooner.

Add digital payment options to your invoices and make footing the bill easier. Add a ‘pay now’ button to your invoices with Xero, so customers can settle the bill in a couple of clicks.

Discourage late payments by introducing late payment fees. Check out this HMRC guidance on charging interest to late-paying customers.

Should I delay payments to suppliers to improve cash flow?

Only as a last resort. Reliable suppliers are essential for businesses, and paying late could damage your relationship. You'll be passing on the same cash flow issues you’re experiencing to them.

If you have no choice but to delay payments to suppliers, make sure you have a conversation with them first to explain the situation and describe how you’ll correct the situation.

How to handle late payments with clients and suppliers

Having good relationships with clients and suppliers is crucial for dealing with late payments. If you know your clients and suppliers well, you can have an open and friendly conversation about the situation.

Beyond email and phone calls, you could also use SMS automated follow-ups. According to a report by Chaser, businesses that use a combination of SMS invoice payment reminders and email payment reminders increase their chance of getting paid within a week of the invoice due date by 56%.

Software like Chaser and Xero can limit tricky conversations, through friendly and personable automation. Customisable automated invoice follow-ups can help prevent your invoice from getting lost in the inbox. Online payment options let recipients foot the bill in just a few clicks.

How can bookkeepers support small businesses with cash flow?

As a business owner, invoicing on time might be tricky when you’re balancing multiple tasks. Your bookkeeper will prioritise timely invoices and follow-ups for you.

They'll keep your bank reconciliation up to date, so you always have a clear view of what’s coming in and what’s going out. This is important because it equips you with the cash flow forecasting data to plan and make intelligent purchasing decisions.

With a proactive bookkeeper, you can avoid some of the disruption caused by late payments and maintain a healthy cash flow. Combine their expertise with the right software, and you can be confident you’re taking every step to minimise the impact of late payments.

Users have seen results such as saving 15+ hours per week, and have reduced days sales outstanding by over 75% with Chaser. Don’t miss out on faster payments and better small business cash flow. Try the Chaser integration today, in Xero.