While it may be far from your mind when signing that exciting new deal, having a concrete plan in place really pays when your customers don’t
Chasing up missed payments can be a trying process at the best of times. But during an economic period where most businesses’ cashflow is little more than a trickle, getting hold of what you’re owed has never been more important. A recent survey from PKF accountants and business advisers revealed that a quarter of surveyed businesses felt delays had caused cashflow problems and four out of five said they were having to spend more time chasing debt than in the same period 12 months earlier. Protecting oneself from missed payment has never been more important.
So what’s the first step a business can take? In the case of late payment, prevention is most definitely the best cure. As Dennis Horner, partner at PKF, says: “It’s about having a good understanding of the organisation’s profile so you know the risks and you know their history.” When working with an unfamiliar customer or client, make sure you’re aware of their reputation. “Have you done a credit check on them recently?” asks Horner. “You may have dealt with them for years but are they near their credit limit? Have you checked that they’re not in any difficulties so you understand the risk?”
Knowing who you’re working with is important but it offers little protection if you aren’t clear on terms before making the agreement. If your contract clearly stipulates how you will proceed in response to late payments, it makes things unambiguous. “If people are having cashflow problems or want to be difficult, they can use any excuse to hold up payments,” Horner remarks. “So it’s worth trying to ensure that you haven’t got things in the way.” If the client or customer is made fully aware of all of the terms then this means there aren’t any loose threads to the deal that can be tugged to unsettle the arrangement when it comes to payment. “They can’t then say, ‘But I’ve got a query around that’, ‘I haven’t seen this’ or ‘You didn’t give me enough information’,” says Horner.
Once the work is completed, it is vital you invoice right away. The clock starts ticking from whichever comes latest – the completion of the work or the arrival of the invoice – so make sure you’re prompt in invoicing. Make sure you clearly stipulate how long the client has to pay – the standard payment period is 30 days and while this is negotiable you
are under no obligation to accept the client dictating the terms. “If you’ve got a long history with them and you’ve feel the risk is low, you might say, ‘Okay I’m happy to do that because they give me business’,” Horner comments. “It’s a matter of being clear as to which organisation is asking for credit and why.”
So an invoice has been issued. The date for payment comes and goes. But no cheque appears on the mat. What then? How does one proceed?
Don’t be afraid to chase things up. Even in this digital age it’s incredibly easy for things to slip off the radar. More often than not there will be no malicious intent involved. “It could be they’ve got a temporary problem and they just need a little more time,” explains Horner. Rather than spending days fuming over a missed payment it is far easier to simply deal with the situation as soon as it arises.
Sending a written ‘statement of account’ is probably the most official way of letting someone know their payment is overdue. For each invoice a statement of account needs to include the date, invoice number, a brief description of the rendered service and the amount invoiced for.
Always include a separate ‘total figure owed’ at the bottom of the statement, even if only referring to one invoice. Obviously it’s vital you retain a copy of this for your own records.
While you are entitled to claim for compensation and interest on the balance as soon as a client breaches the 30 day deadline, it’s customary to allow a grace period of approximately two weeks for them to pay. According to the Late Payment of Commercial Debt (Interest) Act (1998), you are allowed to issue a penalty of £40 for a debt of up to £1,000, £70 for up to £9,999 and £100 for any amount above that. When you invoice for this additional cost, fill out a separate invoice for the compensation and interest and attach a new statement of account, listing both the original fee and this new figure.
It’s rather unlikely that many clients will let things get past this point. For those that do, the next step, regrettably, involves taking legal action. “It is a bit of a nuclear option,” explains Horner. There’s very little chance after initiating court proceedings of recovering any sort of working relationship down the line so with key customers options such as mediation might be a preferable alternative. But, continues Horner: “If it’s a customer with whom you don’t really want to do business in the future and you’ve exhausted all other avenues then there could well be a situation that you’ve got to go to court.”
This is all reasonably straightforward in theory but, in practice, particularly when you’re invoicing scores of businesses each month, things get a little more complicated. So how can an entrepreneur make it easier on themselves?
“It’s about trying to have a granular focus on the different businesses,” says Horner. “Rather than looking at all of them as a crowd and saying ‘they’re all going to take an extra five days to pay’, it’s understanding which ones are and why.” The most important thing is recognising that different clients need radically different approaches. “It might be that some you do grant more time and others you say that actually you want to keep them under a bit of a tighter reign,” Horner concludes.