Late payments. Just two words, but they can dramatically impact your business.
Although it's slowly improving, Australian businesses can be notoriously slow in settling their accounts. In fact a 2017 report by Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman found that one in five businesses reported a payment delay of over 60 days and about half of local SMBs said around 40% of their invoices weren’t paid on time.
Obviously these numbers are alarming because late payments are not just a nuisance, they have the ability to sink your business. But it's important to not simply dismiss this as the status quo or a problem that is too big to manage. By looking at the affects late payments can have on your business you can tackle the issue head on. As they say: forewarned is forearmed.
THE NOT-SO-OBVIOUS PROBLEMS THAT LATE PAYMENTS HAVE
They can affect your ability to forecast your cash flow.
Performing a cash flow forecast is essential if you want to avoid future financial troubles and to guarantee you're always in a strong cash flow position. Coming up with an accurate and effective forecast may be difficult, especially if you’re always dealing with late payments. This is because you’ll only know what amount of money will be going out in a particular time frame and not how much money is actually coming in.
They can affect your productivity.
As a business owner no doubt you have a to-do list as long as your arm. Having to call up customers and ask them to settle their outstanding invoices is time-consuming and let's face it soul-destroying work.
In the aforementioned report, it was revealed that small business owners spend about 12 days a year chasing invoices that are unpaid. "Chasing overdue payments causes stress and anxiety; it's a waste of time and it fundamentally stymies growth by forcing the business to focus on surviving rather than thriving," Ms. Kate Carnell noted.
They can stop you running your business efficiently.
Late payments impact your ability to run your business well because if you don’t have enough money coming in, you won’t be able to pay your employees and cover your other monthly expenses. Think of this as a domino effect. When one customer fails to settle their invoices promptly, everything will be affected. What's more late payments impact your ability to grow your business. According to Xero, delayed payments can hinder growth opportunities with 34% of respondents reporting they were unable to purchase new equipment, whilst 20% said they couldn't hire additional staff as quickly as needed.
The impacts of late payments can cause a lot of angst and stress for you and cause your business to lose money but the good news is that there is something you can do about it.
HOW TO FIX THE ISSUE OF LATE PAYMENTS
Firstly, there are two major reasons behind delayed payments. One, the payment terms you give to your customers, and two, the way you manage your invoices. By addressing both of these you will be able to lessen the impact that late payments have on your business.
Solution One - Shorten your payment terms
Most small businesses give their B2B customers at least 30 days for them to pay their invoices. But some - usually the large enterprises - opt to extend to 45 days, 60 days, or even up to a 90-day payment term.
Offering longer payment terms just isn’t good business practice. Especially if most of your outgoings (i.e salaries, utility bills, etc.) need to be settled within weeks. With long payment terms you'll probably find yourself running out of funds and having to use your personal money or spend your cash reserves to cover all of your expenses. It’s always better to implement stricter payment policies to ensure your customers settle their accounts quickly.
If you're concerned that your customers will not react well to shorter payment terms, you'll be pleased to know that they are becoming the norm. According to a study from Xero, around 70-80% of businesses give a 2-week or less payment term and more than half of those request to get paid within 7 days. Making the relevant changes to your payment terms will bring you one step closer to fixing your late payment issues.
Solution Two - Improve your invoice management
Creating invoices manually can often lead to mistakes which then leads to delayed payments. A TermSync survey found that whilst customers are often to blame for their payment behaviour, nearly half of late payments are actually caused by invoice errors.
Furthermore, sending paper invoices instead of electronic ones requires a lot of time and effort which is another reason why businesses turn to automating their invoice processing. The faster you invoice, the faster you'll get paid. For example, Xero reports that their online invoices get paid 33% faster than traditional paper invoices.
B2B ordering app, Ordermentum, also offers an invoice automation function. Not only does the app help you by creating a seamless ordering process, automatic invoices eliminate the need for you to chase your late payments. With Ordermentum, your customers get their orders on time and you get paid on time. It's a win-win.
Getting paid on time is more important than you think. As an entrepreneur wanting to secure the bright future of your business, you need to collect payments sooner rather than later in oder to conduct your day-to-day operations efficiently and keep the doors open.
Late payments don't have to become an accepted part of running a business. By making simple changes to your invoice processing you can improve the turnaround time of your outstanding accounts and guarantee you’ll get paid on time, every time.
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