5 Steps SMEs can take to reduce late payments to their business
Last month Liz Barclay was announced as the new Small Business Commissioner to help tackle the issue of poor payment practices within the UK business community. This appointment follows further measures introduced earlier in the year, including amendments to the Prompt Payment Code which means that by July 2020 all businesses signed up to the Code will have to commit to paying all their small suppliers within 30 days.
These are all positive steps, but we have been here before when it comes to encouraging responsible payments. There have been repeated attempts to improve prompt payment practices in recent years, such as the creation of the payment practice reports database and the appointment of several other Small Business Commissioners. Despite this, late payments and long payment terms continue to cause huge issues for small and medium businesses trying to manage their own cash flow and survive in a David and Goliath marketplace.
Late and delayed payment is a stubbornly difficult issue to solve. We wish Liz Barclay support and success in her new role, but any measures that are introduced will inevitably take a long time to reach a position of lasting change. In this period of economic recession, small businesses cannot afford to just wait for Government initiatives to help them get paid on time. They must take the matter into their own hands too.
There are steps small businesses can take to minimise late or delayed payments and in turn help them to manage their finances and bring more balance to their cashflow. Whilst prompt payment is of course the responsibility of the customer, by reducing administrative errors and learning more about their client’s payment practices small businesses can reduce the risk of running out of cash and finding themselves in a more precarious financial position.
Here are five steps you can take to reduce late payments to your business and help manage your cash flow without putting your relationship with the client at risk:
Check the payment terms
The first step is to make sure you are aware of the company’s payment terms before committing to the work. Some larger businesses are already pledging to pay invoices within 30 days, but others may state that they will only pay within 60 days – or longer. Being aware of the payment terms means there are no nasty surprises when payment doesn’t come through when you were expecting it. If the payment terms put you at serious risk of failure and can’t be re-negotiated, you may just have to say no.
Quote the Purchase Order number
This may seem obvious and a minor detail but ensuring a PO number is quoted on every invoice you send is a great way of minimising the risk of delays. Many larger businesses use automated payment software to process invoices, and if the system finds an invoice without a PO it will halt the process and potentially require manual intervention, delaying your payment. It is also worth checking you are sending the invoice to the right contact, as often you may need to liaise with the central accounts payable department rather than your regular day to day contact. Finally, if your services differ from the value on the original PO then you will have to request a new or additional one to ensure you are paid the right amount.
As well as a firm’s set payment terms, it is important to know when they usually process and pay invoices. Most larger businesses have set payment runs at different times of the month. It is also important to understand when you can send the invoice, as this can sometimes only be after the goods or services are received. Enquiring and asking about these can help you plan around when you expect to receive the money.
Learn about your customers’ systems
Many larger businesses use particular payment processes to handle invoices. By enquiring about these systems you can learn exactly what you need to include in your invoices and which details will help to move your payments through. Most larger businesses want invoices to be paid with minimal manual input, so learning about the processes can avoid delays.
As in many parts of businesses, building strong relationships with your customers can be very helpful in dealing with the issue of persistent late payments. A friendly call reminding customers to pay and making enquiries about some of the details outlined above will make life easier for both of you. Often invoices can be overlooked, and hopefully a strong relationship will get the issue resolved quickly. Using your relationship to make a plan for invoicing, including key dates and payment terms, is a great way to minimise risk.
If you have tried all the above and your customer is still paying you late, then there are further steps you can take, including claiming interest and debt recovery costs by including these terms in your contracts. We would recommend contacting the Small Business Commissioner’s office to help you deal with these processes should it come to this stage. You can also arm yourself with knowledge by familiarising yourself with the purchase order cycle paper on the CIPS website.
Small businesses are an essential part of the UK economy and as we come out of lockdown and look to the future it is more important than ever that we all work together to address late payments. By following these steps for best practice, you should help your business to be paid on time, ensuring you have more capacity to develop and build your business.
By Malcom Harrison, CIPS CEO
About the Chartered Institute of Procurement & Supply:
The Chartered Institute of Procurement & Supply (CIPS) is the world’s largest professional body in this field and is the dynamic champion driving the procurement and supply management profession. It is the worldwide centre of excellence on procurement and supply management issues. CIPS has a global membership of over 70,000 in 150 different countries, including senior business people, high-ranking civil servants and leading academics.