Government helping with late payment

The government has recently announced new proposals to address late payment problems, aimed at larger businesses taking advantage of smaller ones. This new government focus on the issue aims to remove a significant barrier to SME growth.

• New Fair Payment Code - the old Prompt Payment Code has been replaced with a new Fair Payment Code, setting clearer standards that businesses must meet. Businesses that show they pay their suppliers promptly can earn gold, silver, or bronze status, encouraging them to make faster payments.
• More transparency about big company practices - new legislation will require large businesses to report their payment practices in their annual reports. This will highlight companies that delay paying small suppliers and hold them accountable to their investors.

According to the Federation of Small Businesses (FSB), more than half of UK SMEs are forced to take out loans or dip into savings to cover cash flow gaps.
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Practical steps you can take to handle late payments

It’s hard to say exactly how effective these new government measures will be, so how can you tackle late payments in your business today? Here are a few practical steps you can take to protect your business:

• Be clear about your payment terms - make sure your payment terms are crystal clear from the day you start trading with a customer. Include terms on your contracts and on the invoices themselves.
• Don’t give too much time to pay - consider introducing or tightening your payment deadlines, especially if you’ve been giving clients too much leeway. For example, reducing payment terms from 60 to 28 days can speed things up and have an immediate effect on cashflow. If you don’t regularly enforce payment terms or don’t have any terms then get your collections team to start mentioning newly introduced terms to those responsible for paying you in your customers businesses.
• Chase payments early and regularly - don’t wait until an invoice becomes overdue to follow up on its payment. Send polite reminder emails a week before the due date and chase them promptly by telephone if payment is late. Many businesses owed money find consistent, friendly follow-ups can make a big difference in getting paid faster, and sometimes they can be used as a contact point/sales call, increasing the amount of business you do with a customer.
• Offer early settlement discount -  offer a small  but worthwhile discount, for example 2.5%, for clients who pay  you early, say after 15 days when terms are 30 days. While this might reduce your profit slightly, avoiding the costs and extra work involved in late payments is worth it.
• Use electronic invoicing (E-invoicing) and payment systems – recent research has shown that E-invoicing can reduce late payments by up to 20%. Switching to digital invoicing and payment systems helps streamline the whole process, making it easier for your clients to pay on time and for you to track payments more efficiently. Benefits of E-invoicing for businesses include:
  • Improved cash flow - E-invoicing shortens payment times by automating the invoice approval process, making it easier for businesses to process payments more quickly.
  • Reduction in mistakes - automated processes minimise the risks of manual entry errors on invoices, which can result in payment delays or disputes.
  • Increased productivity- with reduced admin time, businesses can concentrate on more important things, such as growth and customer service.
  • Tax compliance -  E-invoicing helps businesses keep more accurate and easily manageable invoice and payment records. This makes it easier to complete tax returns and avoid discrepancies.
  • Maintain and build strong relationships with customers -  maintaining a solid relationship with your clients can sometimes help avoid late payments. Regular and open communication about the status of payments can prevent issues before they arise. So stay in regular contact with all parts of your customers business, not just the sales contact.

Taking a proactive approach to invoicing, payments and customer relationships will continue to help protect your business and reduce the impact of late payments. If late payments continue to cause you significant issues or you find it difficult handling overdue invoices, contact Kaizen for advice and help tailored to your business. We’re here to make sure you stay on top of your finances and grow your business. If you do need help, call us on 01482 772261 or email us.