You and your business : Cashflow Management
When customers don’t pay on time… how to prevent late payments
In our first ‘You and Your Business’ post, we look at the importance of cashflow and getting your customers to pay on time.
At a basic level, making sure you have a positive cashflow is a crucial aspect of any successful business. But considering developments for some main contractors this year, it’s clear that cashflow complications can affect even the largest companies. Cashflow is a particular issue for the construction supply chain, and is a common reason for contractors and sub-contractors becoming insolvent. In fact, figures from the Office of National Statistics reveal that cashflow issues are responsible for up to 90% of small business failures. One of the biggest issues affecting cashflow is late payment. Impacting sole trader and corporations alike, paying the materials, tools and labour costs for a job and then not receiving payment can have a catastrophic effect on businesses. Ultimately, we all know you need cash to flow through your business to allow day to day operations to continue unaffected and late payments make this very difficult.
To help boost your cashflow, we’ve outlined our five top tips for avoiding late payments:
Make payment terms clear when quoting
It’s important to be clear with exactly what you expect from your working partnership when it comes to payment from the offset. If you don’t stress your payment terms from the very beginning, a customer might presume it’s alright to delay paying by a few weeks, not realising the impact this has on your business.
Ensure costs are clear before you begin the job
As well as declaring your payment terms, it’s also vital to detail and agree all costs up front. If the customer is confused by the total cost at the end of the job, it can cause problems and delays to payment. Before you begin the job, outline your costs, pointing out any possible areas where extra costs to the customer may incur. Get all of this in writing so when the customer accepts the quote, they are agreeing to both the payment terms and amount.
Deliver high quality work
If you do a fantastic job, customers will want to use you again and will probably recommend your services to friends and family meaning they’ll be more likely to pay on time. Don’t give your customers any excuse to delay payment - deliver the best quality work in the agreed timeframe and customers will be much more likely to pay on time. An upset customer will try to find reasons not to pay. This will not only help to reduce late payments but will also encourage repeat/referral business.
Accept instalments and payment plans for larger jobs
It might be worth thinking about accepting instalments or setting up payment plans for larger projects. For customers who can’t pay up front, this can be a good way to speed up the first part of the payment and is much better for your cashflow.
Chase late payments
It’s likely that you’ll always encounter customers who pay late. Asking for late payments can be awkward, especially if you get on well with the customer, but you’ve done the job so you deserve to get paid on time. Late payments can have a massive impact on your business so it’s vital that you have a strategy in place to deal with customers who don’t pay on time.
If a customer has exceeded the payment terms, start off with a gentle reminder via email or text followed by a phone call. If you still haven’t heard anything, the next step in the debt recovery process is to instruct a solicitor to send a letter before action to the customer. This sets out the money owed and states that you will take legal action against them if they don’t pay what they owe. Getting a solicitors letter is usually enough to encourage most people to pay quickly but if it’s unsuccessful the final action is to instruct a debt collections agency to work on your behalf or you can take the dispute to court.
Cashflow can be the difference between survival and failure for businesses of any size so it’s vital to make sure you do everything you can to get your customers to pay on time. In fact, the issue is so crucial to this sector that it has been recognised at a national level with Construction 2025, the Government's long-term plans for the future of the construction industry, highlighting the need to resolve late payment problems to reduce the impact it has on businesses. If you have any other useful advice, we’d love to hear it.Feel free to get in touch via email@example.com or on Twitter at @eurocellplc.