How do I manage late payments from my customers?

When customers owe you money it can severely affect your cashflow. It is essential to have a rigorous procedure in place to keep on top of your invoicing, manage late payments and know how to proceed if any are left unpaid.

8 steps to managing invoicing and late payments

1. Establish your payment terms and conditions.

You can’t expect someone to pay you on the date you expect to be paid if it’s not there in black and white. Make sure you have a payment policy in place to send to customers at the time of invoicing. This should include:

• Payment due date (e.g. within 7 / 14 / 30 days)
• Accepted methods of payment (e.g. PayPal, Mastercard, Visa, Bacs)
• Your business account number and sort code

Being clear about your payment terms from the outset and providing details of them on the invoice, reduces the risk of any misunderstandings and disputes down the line.

2. Get your customer’s details correct from the start.

This may sound obvious but knowing the exact legal name and status of the business or individual you are dealing with, is fundamental to the relationship going forward. One way to check the details they have provided are correct is a quick search on Companies House. Knowing who your customer is means you can check to see if they are suitable for the amount of credit you need to grant them. It also means that invoices can be produced correctly. Failure to get the details right could result in problems further down the line if you need to take legal action for non-payment of products or services.

3. Invoice correctly.

Invoicing as soon as the product or service has been delivered is vital to achieving a healthy cashflow. Ensure the following for each invoice produced:

• The correct process is being followed (e.g. do you need a purchase order?)
• The business name and address are correct
• The amounts are accurate
• The payment terms are included

It is also good to send a follow-up email to check the customer has received the invoice and asking them to contact you immediately if there are any issues with anything on it.

4. Be prepared to follow up on payments due.

You should create a letter template that you can then use to follow up on any non-payment. You can email and/or post a copy and then follow up with a telephone call to ensure the customer has received it. You will need to stay flexible if there is a large sum of money involved and/or you have concerns over their financial viability and try and work with them to develop an agreed payment plan.

5. Cashflow – make sure it aligns.

You need to carefully consider the payment terms you receive from your suppliers alongside those you give your customers. They need to align so that you have enough cash in the business at any one time to allow for any late payments. Ensure payments due are recorded in your cashflow forecast so you always have visibility of what lies ahead.

Be respectful to your suppliers and pay your invoices within their payment terms. Not only is it good business practice but it demonstrates a wider corporate social responsibility.

6. Follow-up non-payments.

There are times when no matter how good your credit management techniques are, an invoice is still left unpaid. The longer the debt remains unpaid the more likely it is to turn into a bad debt which in turn affects your cashflow. Before deciding whether to take legal action you can issue a statutory demand or employ a debt collection agency.

7. Do your research on what “going bust” actually means.

It is inevitable that some businesses will go bust. To have the best chances of recovering your money it helps if you understand the basic meanings of insolvency, bankruptcy, Individual Voluntary Arrangement (IVA), Company Voluntary Arrangement (CVA), liquidation and administration.

8. Keep up to date with your market

Keep on top of news related to your industry and your client base. Being forewarned is forearmed and will give you the best chance of making the right decisions.

Late Payment Reform

The Federation of Small Businesses (FSB) has put forward a case for late payment reform, highlighting that there is a systematic poor payment culture in the UK.

Latest research from The FSB shows that on average in 2022, 52% of small enterprises were subject to late payments in the preceding three months, with a quarter reporting an increase in late payments.

Xero’s Director of Operations (UK and EMEA), Kate Hayward, warns that the term “late payment” is often not a true reflection of the cashflow challenges small businesses face. “Renaming late payments as ‘unapproved debt’ would be a strong starting point to move away from language that legitimises a poor practice that does untold damage to small businesses.”

Read more here: Time is Money | FSB, The Federation of Small Businesses

Read another of our blogs – 7 Steps To Successful Sales Forecasting

Need help with sorting out your cashflow? Get in touch to see how we can help your business.