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The great small business cash squeeze

Written by Simon J. Walsh, Huw Williams on Monday, 02 March 2020. Posted in Financial management, Finance

We’ve all been there, and a large number are still there, so we know how that hand-to-mouth monthly living can wear you down and eventually take its toll!

The great small business cash squeeze

We’ve all been there, and a large number are still there, so we know how that hand-to-mouth monthly living can wear you down and eventually take its toll!  When you run a business, managing cash is king and many small and medium sized business also get trapped in that hand-to-mouth grind simply because of late paying customers.  At a last glance, some 85% of small businesses are having to manage the impact of late paying customers.

From a lawyer’s perspective, what’s interesting (and alarming) about this is that in almost all contract negotiations, there is at least some time devoted to ensuring there is a late payment clause, including a right to charge interest, but in many cases they are not invoked. 

Even if there is no agreed payment date on an invoice or in a contract, the law says that payment is late 30 days after either the customer gets the invoice or you deliver the goods or provide the services.

The interest you can charge on late payments is what’s known as “statutory interest” which is 8% plus the Bank of Interest base rate for business to business transactions.  Note though that if there’s a different rate of interest in a contract (generally lower than the statutory rate) you can’t claim the statutory rate but instead you’re bound by the contract rate.

Inertia or competing priorities or exhaustion or ostrich syndrome or just wanting to be nice…whatever the reason, many small businesses don’t take advantage of the “sticks” that are available to them when late payments plague their business.  But before a business gets into a corner and has to defend itself with “sticks”, there are a bunch of practical steps that a business can take in order to try to reduce the incident of late payments, and the negative impact this has.

For a start, if you insist on shorter payment terms (14 days is completely acceptable), send invoices on time and then send statements and reminders close to the 14-day deadline, you’re then in a position to start chasing outstanding payments sooner.  On the whole, humans by nature are not good at paying over money, likely rooted in what psychologists are calling “money anxiety disorder” and therefore we need to be chased to make payments. 

You should ensure you have someone on staff whose role it is on a fortnightly basis to chase outstanding payments.  That person should have a good degree of emotional intelligence and empathy and shouldn’t shout or be aggressive, but use non-threatening language (and a certain amount of charm) to secure a commitment to pay.  

Another tip is to make sure you have the facility to accept credit card payments, so when your staff member is chasing payments, they can ask if the client has a credit card and if they say yes, tell them you’ll be able to take payment by the card.  If the client says that they’re writing a cheque, if practical, offer to call by and pick up the cheque.   

For new clients without any trading history you should either ask for some or all of the payment upfront and tell the client that as they build up a history with you, you will do future work on invoices and always do a bit of a basic due diligence.  Look at their accounts filed at Companies House, and if they’ve only just been incorporated and have not filed any accounts or have a balance sheet with assets less than the value of the transaction for which you’re giving them credit, then don’t extend credit!

Of course, businesses always have the option of looking at a form of “credit” (meaning there is a cost to the business) such as invoice discounting where a third party advances a portion of the funds owned against unpaid invoices.  If though, you attached importance to credit contracts and are disciplined in your approach, you will likely find that you’re on the front foot, rather than the back foot with respect to unpaid invoices.  This of course means that rather than worrying about cash, you can focus on your passion which is likely what got you started in the business in the first place.

About the Author

Simon J. Walsh

Simon J. Walsh

Simon J. Walsh is a Partner at Oury Clark Solicitors
Huw Williams

Huw Williams

Huw Williams is a Partner at Oury Clark Chartered Accountants

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