One of the biggest issues most finance departments face is getting their invoices paid on time. The UK government believes late payments cost the economy £11 billion a year, and waste 133 million staff hours annually across all UK businesses.
And while the government has committed to reducing the burden that late payments place on business, it is an issue that businesses have to tackle themselves too. As late payments impact cash flow, hold back investment and damage business relationships, businesses need to try and avoid them happening.
The first step to reducing the impact that late payments have on your business is to understand why they happen. From there, you can think about ways to lessen the frequency or reduce the impact they have when they happen.
In this post, we’ll look at the most common reasons clients don’t pay on time to give you context and help you find ways to mitigate the impact it has. We’ll also offer some tips to help you avoid late payments from your own clients and customers.
Assuming there is no dispute over your bill and your client is just late in paying, here are the three main reasons that could lie behind their actions.
Sometimes your client just doesn’t have the money to pay you. While that’s not your fault, it is your problem.
It might be a temporary cash flow problem. In this case, you can hold out and hope that they will be able to pay you soon. Alternatively, it might be more serious than that. They may have serious financial problems, and regardless of how long you wait, the issue may only get worse.
Some companies delay invoice payments because they want to keep money in their bank accounts for longer. Preserving their cash flow and treating your business like a free credit provider is their aim here.
Although they will earn only a very small amount of interest on their funds, delaying payment for as long as possible provides an additional cash-flow benefit. This type of late payment can harm a company’s reputation and make suppliers unwilling to work with them.
Your customer may have genuinely not received your invoice, failed to log it, forgotten about it or somehow lost it in their system.
There is a very real chance that the odd emailed invoice may not be properly delivered. You may even be using the wrong contact details or email address.
Other problems from your side can include not having the purchase order number on the invoice or having incorrect order, pricing or VAT details on it.
Automate your invoicing and collections with NetSuite to reduce errors and delays.
Taking a legal approach is one way to attempt to reclaim any money you are owed. This is expensive and time-consuming, though, and suing a customer is really a last resort for most businesses.
Here are five steps you can take to avoid late payments.
You can’t change how efficient your clients are at paying, but you can make the process they go through as easy as possible. If it takes less time and admin effort for them to pay, they’re more likely to pay quickly when that’s possible.
Ensuring invoices are sent in a timely manner is the first step. You should also ensure that all necessary information is covered on the invoice – especially the pricing. And obviously, check that it’s been made and sent to the correct contact, with clear instructions on how to pay.
Even for repeat customers, you need to ensure your invoices are clear and easy to action. Otherwise, you’re creating unnecessary friction for your clients, and this can put them off paying promptly.
For customers who are struggling financially, a payment plan that spreads costs over time can be a real help. It feels a lot more manageable for them and lets them commit to paying when a large payment is beyond their means.
Even if they’re having serious problems with liquidity and paying their debts, it can still be the best strategy from your point of view. It puts you at the front of the queue for payment before other creditors, so it makes it more likely you get some of the money you are owed.
For customers who are always forgetful or poor at handling admin, you could consider asking them to set up standing orders or direct debits.
This is actually good practice for recurring invoices, but not all businesses will do so, either by accident or by design. Once they’re set up, payments will always be made on time, and you can be sure of receiving them.
It’s good admin practice to regularly and frequently remind customers about outstanding invoices anyway. Issuing overdue invoice notifications and calling clients to chase for payment is an essential part of the accounts receivable role.
If you add a request to set up a recurring payment as part of invoice chasing, it can serve as a natural prompt or reminder for customers.
If you have clients who you believe can pay on time but still frequently pay late, you can offer a discount or other benefit as a reward for prompt payment. This encourages them to prioritise paying early with a tangible benefit so they get it done ‘now’, rather than ‘meaning to sort this out’ but then not getting round to it.
For example, you could offer a 1% prompt-payment discount off the invoice total if paid within 10 days. Even though the full amount is still payable within 30 days, the discount may encourage some clients to pay you sooner.
You need to strike a fine balance here and decide whether it’s better for you to be paid in full or paid less but on time.
If you’re a service provider, then another way of ensuring payment is to withhold any deliverables until you’ve been paid.
Alternatively, you could establish a series of payment milestones, so that a proportion of the final fee is made up front, and then regular percentage payments are made in stages as the project continues.
This is an extreme option though, and should only be used when necessary.
A missed payment is always going to have a temporary financial impact on your business. However, when too much staff time is spent chasing those payments, then the associated costs completely spiral. And the inevitable financial impact takes on a completely avoidable increase.
Automating your invoicing and invoice chasing process reduces the time your finance team spends on these tasks. In turn, it reduces the financial impact of late payments.
The most reliable, easy and effective way to automate most financial processes is by using an ERP. Different ERPs help with chasing overdue invoices (dunning processes) to differing extents. Sometimes, they just make the recordkeeping around invoices simpler, or make it easier to stay on top of what correspondence is sent and when. But some offer much more support.
TaskCollect is an application that we at NoBlue2 built to ensure NetSuite ERP provides the most complete support possible for invoicing and invoice chasing.
By combining information from a central database with automated accounts payable functionality, there is no need for staff to duplicate data entry, so errors are reduced. With more accurate data and streamlined workflows, your admin is improved and your debtor days are reduced.
In the UK, any payment that is not paid within the agreed payment terms is considered late. This means that the exact timescale will depend on your own conditions and what you set out. If no payment terms were agreed, then a payment is legally considered late if it is unpaid 30 days after the customer received the invoice or the goods/services, depending on which is later.
Yes, according to the Late Payment of Commercial Debts (Interest) Act 1998, you can charge interest on an invoice that is not paid on time. This can be statutory interest of 8% above the Bank of England base rate, unless your contract sets out a different rate.
Dunning is the process of contacting customers to collect overdue payments. It usually starts with gentle reminders and escalates to a formal demand, but it also refers to any structured system by which late payments are chased.
Dunning used to be a very time-consuming process; however, these days it can be greatly streamlined through ERP systems like NetSuite. Additions like the TaskCollect module can automate the processes even further, so less manual chasing is needed.
Debtor days measure how long on average it takes for a client or customer to pay you. If this period starts to increase, this can be a warning sign that cash flow is struggling for a business.
Tracking debtor days can help you spot slow payers before they become a serious problem, so you can address them before your own business is affected. NetSuite uses AI-based pattern recognition to monitor your payments received to identify patterns including repeated late payments so that you can act proactively with customers to avoid them where possible.
Legal action should always be the last resort for late payments. You should try reminders, phone calls, formal letters and offers of a payment plan before embarking on legal action.
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Nowadays, businesses accrue increasing amounts of data – whether they’re growing or not. The challenge is collecting and using that data wisely.
Late payments are an inevitable part of business accounting, but they don’t have to be a crippling one. With automated accounts receivable software like TaskCollect, you can ensure that the process of chasing them doesn’t cost you even more in staff time or resources.
Find out more about how to streamline your invoicing process and reduce time wasted on chasing payments. Talk to our team today!
