Cash flow concerns can be minimised by following a few simple steps

One of the main issues currently facing SMEs is how to manage late payments, with members of the Forum of Private Businesses citing it as their main concern, surpassing even taxation and regulation.

Late payments can have a devastating effect on a company’s cash flow and can cause even the most successful firms to fold.

Those who repeatedly pay their invoices late may be experiencing deeper financial issues, which is why credit insurance policies are growing in popularity. Prudent businesses are increasingly looking to protect themselves against the risk of bad debt, particularly if they are embarking on a growth strategy where availability of working capital will be crucial.

The following tips from Lloyds TSB Commercial Finance can help companies to decrease the time and expense spent on recovering unpaid invoices:

1. Credit check your customers – ensure your customers are able to pay their bills by arranging a credit check on them. Using a credit rating facility can help businesses identify potential risks in their customer base.

2. Establish clear terms and conditions – agree payment terms before you begin to fulfil an order. If a customer intends on taking 60 or 90 days to pay before you start a contract, you can make an informed decision on whether to take the work and plan ahead on how to manage the debt terms so your business’ cash flow does not get caught short.
 
3. Issue invoices accurately and quickly – when raising an invoice, include the vital information in a simple document. Try to establish a contact in your customer’s accounts office to make any financial debt management easier. Raise invoices as soon as the work is completed instead of waiting until the end of the month.

4. Offer early payment discounts – depending on the size of your business, it may be an option to offer a discount as an incentive for customers to pay early.

5. Make payment easy – using an electronic payment system makes it easy for your customers to pay you. The funds are cleared and available for use on the day they're received, and will earn interest immediately. 

6. Assert your right to charge interest – in many cases, the threat of potentially having to pay interest will be sufficient to make customers pay close attention to their payment terms. Reiterate these before accepting an order and ensure your Ts and Cs quote the Late Payment of Commercial Debts (Interest) Act 1998 which allows you to charge interest on overdue debts.

7. Take out credit insurance – employed either as a stand-alone facility or bolted onto an invoice finance package, credit insurance policies such as Lloyds TSB Commercial Finance’s Debtor Insurance, can safeguard a business against the risks associated with late payment and debtor failure.

By following these simple steps, businesses should be able to prevent and manage late payments and ultimately improve their cash flow.