Cashflow problems are one of the biggest killers for start-ups. Which is why it can be so frustrating when your debtors drag their heels when it comes forking over money that’s rightfully yours.
Research by credit reporting and debt collection firm Dun & Bradstreet (D&B) reveals businesses wait nearly eight weeks to be paid by other companies, according to the latest Trade Payments Analysis. The average invoice payment time rose to 55 days during the first quarter of 2013, comparing to a national average of 52 days in the previous quarter and 53 days a year earlier.
Start-ups aren’t the only ones waiting, but it’s probably much tougher for them given many have limited cashflow. The research found that the majority of all invoice payments in Australia are being paid late, with 48% of accounts settled between one and 30 days beyond standard payment terms, while 38% are made on time.
Landing a contract with a large company might not be in your favour, either, with the analysis finding that the nation’s biggest companies are the slowest to pay, with companies employing more than 500 people take 58 days to settle their accounts in the first quarter of this year.
D&B says if you’re still chasing invoices from the last financial year, now is the time to write them off. Bad debts are tax deductible and can be used to offset your taxable income.
Gareth Jones, CEO of Dun & Bradstreet says a slowing cashflow cycle has an effect on a business’ ability to invest in the growth of their business.
“More significantly, however, is if late payments are impacting a business’ ability to cover its own costs of operation. We know that 90% of small business failures are caused by poor cashflow.”
SiDCOR Chartered Accountants founder Paul Siderovski says 90 days is too long to wait for payment, suggesting that 30 days is the most a small business should be waiting for payment.
“You’re not a bank. Start-ups need to be clear about their vision and articulate that to the customer. Make sure you talk to the decision maker. Be enthusiastic. Deliver above and beyond the expectations of the client so that you can ask for better terms.”
To negotiate better terms, make sure discussions around payment form part of the initial agreement, recommends Diane Lucas of bookkeeping specialists, Direct Management.
Put an agreement or engagement letter in place detailing trading terms and if terms are exceeded, rely on your debt collection policy. Act quickly before terms extend too far, she says.
Also, affiliate yourself with a professional body so that you have some grunt to your collection letters. Lucas is supported by the services of the National Revenue Corporation, which ensures accounts are paid in accordance with the agreed terms of trade.
“They are your terms so act upon it when they are exceeded. If the business is consistent in their handling of their account receivables, then the customer learns that the business they are dealing with are professionals,” Lucas says.
But if you’re struggling with late payers and you didn’t insist on better terms up-front, start-up co-founder Paul Slezak says vigilance is the only way.
“One thing I’ve learned is that it often has nothing to do with what your payment terms are, but more so on how vigilant you are in actually following up and chasing your customers for prompt payment,” the co-founder of recruitment firm RecruitLoop says.
“So if you stipulate that your trading terms are 14 days and the invoice hasn’t been paid on time, you should start following up immediately. Never get defensive, never be demanding, but just having an adult conversation with your client or sending a gentle reminder email will get the invoice paid.”
Slezak says you should never be afraid to put on the debt collector hat.
“It’s not about wielding the proverbial baseball bat. It’s about being comfortable in having tough conversations and standing by the quality of the product or service that you have already delivered. If you have certain terms and an invoice hasn’t been paid, initially a gentle email reminder should suffice,” he says.
“But then if the payment drags on, picking up the telephone and speaking to your client is essential. However, don’t go in guns blazing to the innocent accounts department. They are not the decision makers in terms of which bills get paid and when. Ensure you speak to the decision maker in the business – the person that actually engaged your company. It’s about being on top of your debtors situation, following up promptly and remaining professional at all times,” he says.
Start-ups should also get to know major suppliers well and allow them to gain an understanding of your business and its cashflows, recommends Rob McGuinness of chartered accountancy firm Nexia Australia.
“This way, they will be more sympathetic to better credit arrangements. The underlying message is to be honest and personal in your business approach.”
Try and collect payments from your customers in a shorter amount of time than is required for you to pay suppliers, he says.
“You need to understand your cashflow commitments and structure your dealings with these in mind,” he says.
Another idea to consider is offering debtors a discount for paying on time.
Melbourne business coach Maureen Pound offers a 7% discount if invoices are paid early. She recently had an $18,000 invoice paid up front for work to be done over the following year.
“The company engaging my services got the money to me by December 31 to receive a 7% discount and now I am able to solely focus on giving them the best possible service.”
Either way, make sure you’re ruthless when it comes to defending your cashflow, recommends John Hagerty, managing director of management consultancy, Be Business.
Don’t bother writing 21 days on your invoice if the client always pays on the last day of the month and won’t budge from this, he says.
“If your cashflow can’t allow for the way some of your clients insist on paying, then sometimes you need to be able to make the tough decision and cut them loose. At the end of the day, you’re running a business and you’re not there to lend money to people for free.”
TOP TIPS
Be paid in advance where possible Or ask for a deposit at the very least. If your industry doesn’t allow upfront payment, keep payment terms to a minimum duration.
Set up easy payment methods Such as direct debit, credit card, BPay, PayPal, cheque and debit.
Ensure invoices are correct Incorrect invoices are usually set aside until there is time to investigate.
Send two invoices with the same invoice number One to the person who placed the order and a copy to the person who manages the accounts. Also, reference the person who placed the order on the invoice
Get tough with repeat offenders Establish a process for managing bad payers. Send them an email or call a week before next payment to check it will be made. You can also put bad payers on a warning system. Once the customer has exceeded the warnings, send a notification that you can no longer do business with them.
Source: Jo Ucukalo, CEO, Handle My Complaint
