Overdue payment occurs surprisingly often among businesses, especially within SMEs. According to Atradius latest research, 88.1% companies in Australia experienced overdue payment from their B2B customers in 2017. Not only is it frustrating for business owners, but it also can create cash flow problems for profitable businesses. Some of these payment problems are so severe that it forces SMEs out of business. Thus, keeping quiet and hoping to be paid soon is not the best way to tackle the situation.
Benefits of Prompt Payment
Improve Company’s Cash Flow
Companies who receive their payments quickly will have more liquidity as their cash conversion cycle will be better.
This will allow SMEs to invest further in their business as they will not have to worry about having restricted capital.
Reduce Bad Debt/Non-Paid Risk
Payments will have a higher tendency becoming bad debts the longer it is outstanding. Thus, encouraging a business environment with prompt payments will reduce the risk of unpaid invoices, which will save up a lot of money.
Build Stronger Relationship with Your Customers
Prompt payments will form the most ideal customer-supplier relationships. It will provide more space for them to negotiate better deals and improve the financial wellbeing of the market. This in turn will encourage further business opportunities and growth.
Below are some tips to enforce prompt payments so that your business will not be jeopardise from overdue payment.
Tips on Getting Paid On-Time, Minimising Overdue Payment
Assess Creditworthiness for New Customers
It is crucial to assess the creditworthiness of the new customers and set appropriate credit limit and credit term accordingly. This will reduce the risk of late payments and bad debt. It is advisable to start with a lower credit limit first and extend according to the payment performance.
Invoice Customers Promptly
Customers cannot pay unless they have received their invoice. Therefore, it is important to raise invoices promptly. Having an online invoicing process will speed up the time customers take to receive their invoice since paper invoice takes longer and may get lost in the mail.
Provide Detailed and Transparent Invoices
Payments can be quicken if there are no hiccups during the process. Ensure that all the information in the invoice is accurate and detailed. Some of the details that must be included in the invoice are:
- Name and contact of your company
- invoice ID,
- invoice date, due date,
- pricing, tax details,
- order number,
- the description of the product,
- payment instruction
This will reduce processing time of the invoice as all the necessary details are already available.
Simple and Multiple Payment Methods
By implementing simple payment methods and offering multiple payment options (such as direct bank transfer, cheque, credit card), the likelihood of the on-time payment will increase. Ensure that payment instructions are clearly stated in the invoice itself to further encourage prompt payment. This in turn will increase the chances of your customers paying on time.
Offering Discount on Early Payments
Having incentives that aligned with the customers’ interest will motivate them to make earlier payments. Rewarding customers with a discount for early payments may make your invoices more significant to them.
Example discount intensive – 2% 10, Net 30 this means if your customer pays within 10 days, they would receive a 2% discount. If the payment is post 10 days, then it must be paid in full.
The level of discount available will depend on:
- discount standard of the industry
- competitor landscape i.e. how much is your competitor offering
- your customer’s ability to pay. If they have been paying early, there is no need to offer early discount. On the other hand, if your customer has been paying late, this might be a good tool to incentivise for an earlier / prompt payments
- how fast you would like to re-coup your cash back
For cash flow management, ensure to include the discounting into your costing and pricing to avoid any unexpected cash flow deduction.
Regular Follow up on Payments
If the payment is still not made several days post due date, a follow up phone should be made. This will help to understand the reason for the late payments and resolve the issue accordingly. A regular follow up phone call is recommended if the customer often delay payments.
Cash flow Solution
Receiving prompt payments is not just the responsibility of the customers, the creditors also have to play their part in ensuring their payments are received promptly. Consider these tips to improve your DSO. It will certainly improve your cash flow, allowing you to invest more in your business.
If your business requires a cash flow solution that can unlock the outstanding invoices into cash, invoice financing might be the solution for you. At InvoiceInterchange, we help businesses draw down funds against outstanding invoices within 24 hours with a small fee. You no longer need to wait for your customers to pay you, reducing the impact of potential overdue payment.
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