How Late Invoice Payment Impacts Small Businesses
How does the late payment of invoices impact small businesses? Now we've all been there. You've been in business for a while and someone starts paying invoices late. Everything's all good to start off with, and then they start paying things late. What's worse is if you'd have to go out and buy a product to allow for it to be sold. Whatever you're doing, maybe you're modifying something and then on selling and you've had to fork all that money out for the product.
How Does the Late Payment of Invoices Impact Small Businesses?
When an invoice is paid late, it has significant consequences on the small businesses who were ultimately issuing the invoice. Now, it might be a big business is taking time to pay, sometimes it'll stretch you out 30 to 45 days or another small business not paying on time because of cash flow issue or bad or poor time management.
Setting Up Continual Invoice Reminders: Direct Debits
Now, there are lots of ways that you try and overcome this, and one of the easiest ones is continual invoice reminders or setting up people on direct debit requests where you're actually able to pull the money instead of waiting for them to push it across to you. These programs and systems out there are pretty cheap, they can do that, and I definitely suggest you jump on and get something like that in your business. You'd be surprised at how many people will just be totally okay with it.
Now, this might not necessarily overcome the problems of the people that are taking 30 to 45 days, but let's say you've got a business with 50 clients and of the 50 clients, everyone's paying as they're meant to be. If you can set up a direct debit request where you're able to then have everything automatically paid, you know on the tenth day or whatever day you're going to withdraw that money that you're going to get a sum of money, a bulk sum of money, which is great. It means instead of it coming in drips and drags, your reliable customers are going to be paying you reliably. Now something I found that's quite interesting is a lot of the customers that don't pay reliably, whether it be from cash flow issues or because they've got a much larger term of 30 to 45 days or something like that, the customers that don't pay on time are also the customers that are probably not going to be interested in signing the direct debit request form.
You May Also Like:
It's Very Important to Evaluate Your Clients
The first aha moment for us, if we're bringing in a customer and they don't want to sign a direct debit form, then we know straight away there's a good chance they're going to be pretty shit at paying. That's proven true. In over 19 years in business and 11 years with direct debit requests being an option, it's only ever the customers that don't pay well and pay on time that doesn't want to go on them.
All About Discount: Consider advance and on time payment
So how do you overcome that problem? What we found is if we give a reward to having the money paid on time, so we give 5% off the discount, pay on time discount of 5% or 10% or something like that, that can give the incentive to make sure the invoices are paid on time. Give a reward for having the invoices automatically being paid, because if that is the case and that's what's happening, you have instantly your invoices being paid on time. Alternatively, instead of having that lost interest while it's sitting in their bank account instead of yours, you've charged accordingly and you've increased the value of the invoice. You've given a pay on time discount and the actual price of the invoice is at a higher price. The way to do that increase all of your prices by 10% or 20% and then give 20% discount for everyone that pays on or before the due date. That means that everyone that's doing the right thing by you is getting what they deserve and they're getting the quality price that you're putting out there. The people that are not doing what they're meant to be doing and they are keeping the money in their bank account for extended periods of time, if they're a big conglomerate and they're happy to do that, then they're going to be paying accordingly.
How about Working in Block Hours?
Otherwise, if they're a smaller business, what I would suggest, and they're going to have trouble with that, I would suggest is maybe suggesting, depending on the type of service that you're offering, is paying in block hours or having some sort of residual that sits with you so that they can pay on their terms as it comes available to them, but they're always in front instead of being always behind. This means that when they want you to do some work for them, you're going to be jumping at it. It's going to make sure that you're doing the quality work you're used to doing, and they're getting the quality of service that they want to be getting.
Double Checking Your Payment Terms is Important
I would suggest anyone to double check what your payment terms are. Maybe bring down the payment terms to like a net 10 or something like that. Depending on the industry that may or not be received well, but just know that you can do that and it will mean at least the customers that are paying when they should be will then be getting the money to you sooner rather than a whole bunch of them. So if you're like a net 30 or net 45, at least net 10 will bring the people there a bit quicker.
Make Sure You Have Terms and Conditions
Having terms and conditions that back that up whatever the terms and services that you're doing are so important. For instance, as an IT company, if they don't pay their invoice on time and they request support, well then the support isn't going to be instant support. It's going to be slower when we're going to be looking at that ticket, and that's written into our terms and conditions. If they don't pay their invoice, we can't pay for the licences and most businesses operate the same way. If you're a printer, it's the same sort of thing. You need to make sure people are paying you on time. So write it in your terms of service. Make sure that is exactly what they are anticipating.
Be Aware of Excuses: How Late Payments Will Affect Your Business?
For your late payments, either give a reward for people that are paying on time. It's a bit harder to actually enforce giving someone a penalty for paying light. It's better to give people a reward, it's a positive frame around the same problem. Be aware of people's excuses. So many times, you'll hear these different things. "Oh, my credit card doesn't work at the moment, it's got hacked." "We're having a bit of a problem with cash flow." "The business burnt down." All these are real excuses that we've seen over time. The business burning down one was only part of the business, but we gave them relaxation. We're all human. You want to make sure that you're doing the right by them and they're doing the right thing by you. If someone paid an invoice late to us, that would be fine, if it's a once off thing, but if it's an ongoing thing that's affecting our cash flow, and that in turn is affecting our relationship with this client, it's not fair that we are doing the same level of support and the same everything for that client that we're doing for another client that is paying on time and does have a high level of integrity when it comes to the finances. Make sure to rein it in before it becomes a problem because it can really affect your business. Have a think about what it is that you're selling.
Late Payments Add Up; Never Miss a Payment
If your invoices are constantly paid a month late and the total net value of all of the late invoices were, let's just pick a magical number out and say it's $10,000 and they're all paid a month late and that's constantly, over 12 months, that works out to be about $520 a year. That's just a simple $10,000 a month coming in, talking not much money realistically, and because it's being paid a month late constantly, over 12 months, that's actually cost you $520 with today's current interest rates compounded daily. That gives you a bit of an understanding as to how much it's actually costing your business. Now $520, you break that back down, that like a carton of beer. A carton of beer a month. A six-pack a week, a beer a day and an extra one on Sunday, and that is what is costing you for them paying their invoices late, so get your act together and get it changed. Imagine if you weren't having $10,000 worth of invoices being paid late every month, compounding each month. If it was $100,000, that's even worse, it's terrible stuff. So make sure you rein in your priorities and get your invoices paid on time because it means real dollars saved for you, and real dollars saved for you means you can do more cool stuff with your business.
The Final Word