How to minimise late payments and unpaid invoices.
Getting paid on time – and in some cases, getting paid at all – is a recurring problem for many small businesses.
Part of the problem is the power imbalance. If your product or service has relatively few buyers and plenty of other suppliers, your customers are more crucial to you than you are to them. That makes it easy for them to dictate terms: you might grant 14 days credit, but if they insist on 90 days there's not much you can do about it apart from trying to find replacement customers.
Furthermore, some big companies are reportedly forcing 120-day terms onto their small suppliers and then offering to arrange loans at “favourable rates to help the suppliers’ cash flow.
Even if your customers are primarily other small businesses, late payments by bigger companies further up the chain can ultimately crimp your cash flow.
There's not much small businesses can do individually about these structural problems, though fortunately there are some efforts being made by the Australian Small Business and Family Enterprise Ombudsman and others to have them addressed by regulatory changes. (A good start would be to give all small businesses a right to payment within 30 days that can't be ‘negotiated’ away.)
However, there are some practical steps small businesses can take to improve their chances of being paid on time, or to chase payments so they are less likely to become too overdue.
Here are some tips from Square country manager Ben Pfisterer and other sources that may help.
Send simple and user-friendly e-invoices
It's a truism that customers aren't going to pay your invoices until they are received. So invoicing as soon as possible after the goods or services are supplied is an essential first step, and sending the invoice electronically rather than by post can shave as much as a week off the process.
Electronic invoices generated by the popular cloud accounting systems as well as Square's POS system typically provide a ‘pay now’ button encouraging customers to settle their debt immediately – though we suspect that works better with consumers or other small businesses, because larger operations tend to follow their own rigid processes (unless the purchase is quite small).
“E-invoices also provide a user-friendly experience for your customers, allowing them to pay you quickly and securely directly from an invoice, without the fuss of having to log into their online banking platform,” said Pfisterer.
There's data to support that position. According to Xero Australia managing director Trent Innes, “Our data has shown that businesses using a combination of online payment services are paid 27 per cent faster than those using offline invoices.”
MYOB has found an even bigger difference: “Australian businesses on average wait 45 days to get paid. Invoices paid through PayDirect Online average 11 days.”
Use online payment tools to your advantage
You don't need a card terminal, or even a low-cost device such as Square's Reader, to accept credit or debit card payments.
“Businesses can now use online payment platforms, like Square’s Virtual Terminal, that allows you to enter a customer’s credit or debit card information straight into a web browser,” said Pfisterer. Again, this is more applicable to consumer and ‘petty cash’ purchases, and the downside is that fees are higher because there is no need for the card to be present.
Accept new types of payments
Mobile wallet payments are starting to take off in Australia, Pfisterer observed. The arrival of Apple Pay got a lot of attention, but Samsung recently announced that 1.7 million more Australians will be able to use Samsung Pay with the addition of 38 more banks and credit unions getting onboard the payment service via Cuscal.
“This is a huge amount of potential customers and Australia’s small businesses need to make sure they are equipped to stay competitive and cater to every way their customer wants to pay. Accepting mobile wallet payments is a great way to do this,” he said.
Use data to assess your payment processes
Analysing your data can provide important insights into what’s working and what needs to change in your business.
“By pulling reports that can analyse sales by categories – including the ways your customers are paying, time of day they’re paying and the employees that are helping them pay – you get the best summary of your customers purchasing habits and can adjust your business processes accordingly to maximise profit turnover,” said Pfisterer.
Follow up late payments
Making it as easy as you can for customers to pay promptly is a good start, but what do you do when the money doesn't arrive in your bank account when expected?
A couple of years ago we mentioned ezyCollect's Five Things You Should Be Doing Right Now To Reduce Outstanding Accounts Receivable, and now that company is warning of the 16 Damaging Mistakes to Avoid when Sending Invoice Reminders.
Those 16 mistakes should be read in the context that ezyCollect provides a largely automated service for collecting outstanding invoices, with reminders of increasing severity and the option of escalating to letters of demand or turning matters over to a debt collector, but many of the suggestions are actionable even if you're not an ezyCollect customer.
For example, the number one mistake is not sending reminders, and number seven is not attaching a copy of the invoice to a reminder. (Some small business accounting systems such as Xero provide these capabilities to some degree.)
So don't be afraid to send reminders, accompanied by copies of the relevant invoices. That takes care of two common excuses: “I forgot it was due” and “I misplaced (or didn't receive) your invoice”.
Some of the ideas are more easily performed with ezyCollect, such as consolidating the reminders for all of a customer's outstanding invoices, but you could do them manually if you think the time you'll spend is worth less than the price of an ezyCollect subscription (from $40 a month when billed annually, and a free trial is available).
Anyway, do read the list of mistakes. If you're not making any of the first 15, all it will cost you is a couple of minutes. And if a change of practices reduces your receivables, that's got to be a good thing.