Businesses of all scales are threatened by the scale of the current late payment crisis, and repeated research shows that the situation is getting worse.
A 2019 study by Xero and Paypal into SME late payments found that 48% of all invoices issued are paid late. Further research by Barclay’s in 2021 found that 58% of SMEs are usually paid late.
Just a year ago, research conducted by Chaser found that 87% of businesses are typically paid after their invoice due date. These numbers make the situation startlingly clear; late payment of invoices is now more prevalent than ever.
But why is this such an issue for business? Why should you, and every other business, care about late payments?
The punishing impact of late payments
The consistent late payments issues highlighted by the research outlined above can have huge material implications for businesses. Late payments can have a devastating impact on cash flow and, in turn, the operations and longevity of your business.
Late payments result in delayed income, halting the process of paying suppliers or employees; they create unnecessary administrative work dealing with customers who do not pay. Constantly chasing customers for payment takes up time and resources that could be spent on other, more productive activities.
Businesses in the UK waste 56.4 million hours chasing late payments. To put that in context, there are only 8760 hours in a year.
Late payments also cause a wide-ranging set of issues than most business owners anticipate. An inability to properly predict cash flow can cause businesses to limit their purchasing power, preventing them from expanding and growing in the long term.
In fact, research by Quickbooks/Intuit found that 89% of business leaders believe late payments are stopping their businesses from growing
Accurate forecasting becomes far more difficult with unreliable customer payments, stopping businesses from investing in their future or scaling up.
The rising cost of the late payment crisis has already driven thousands of businesses to the brink, with many of them ultimately failing. In the UK alone, 50,000 small businesses face bankruptcy every year due to late payments.
In response to the late payment crisis, businesses must create a proactive plan to ensure their customers pay invoices on time. Many businesses react to the issues caused by late payments by attempting to increase the output of their commercial team to generate additional revenue.
This kind of silver bullet is, at best, a temporary solution, as it does not address the root of the issue; late payments. To reduce the burden of late payments and to ensure regular cash flow, businesses must create a proactive credit control plan that should be applied in all customer interactions.
The good news is that businesses can use several proactive credit control strategies to reduce late payments and ensure that all invoices are paid on time.
Strategy 1: Have a solid credit control policy in place
It is exceptionally difficult to have any kind of proactive plan in place if you have not taken the time to draft and implement a structured credit control policy.
A well-thought-out and well-implemented credit control policy should clearly outline to both current and future customers the payment terms and conditions associated with any invoice. This should include information on the expected payment date, related fees for late payments, as well as turnaround times for payments.
Having a strong credit control policy in place allows you to ensure that all invoices are paid promptly by maintaining an open line of communication and ensuring that customers are aware of the terms and conditions.
A consistent policy also allows you to set customer expectations and limits before any invoice is issued. It also provides guidance for your staff and ensures that they are aware of the payment policies in place.
While each company will require its own unique policy, Chaser's credit control policy template provides a great starting point for any business.
Strategy 2: Don’t be shy about implementing credit checks
Credit checks are the first line of defence against customers that are likely to pay late or not at all.
When a new customer applies for credit, you should take the time to do some due diligence and consider their financial background, credit score, payment history, and other factors that can help inform your decision about offering them terms.
Failing to complete these checks puts your business at risk of extending credit to a customer who may be unreliable or incapable of repaying what is due.
If done correctly, credit checks can provide valuable insights into existing and potential customers' financial health and reliability. This allows you to recognize any red flags before they become an issue and reject the applications of high-risk customers.
At the same time, credit checks should not be restricted to customers who are new to your business. Don’t forget to regularly review the creditworthiness of existing customers, especially those that have been late with payments in the past.
Monitoring changes in your customers’ credit reports gives you an insight into their financial health. This isn't a matter of trust but rather an essential process to ensure that you are not offering lines of credit to customers who might not be able to pay on time.
Your customer's payment behaviour and financial health are essential metrics when considering the terms of any credit agreement, and monitoring them regularly allows you to make more informed decisions.
At the same time, communication remains critical. If your customer seems to have financial issues, it is always better to address the issue head-on and discuss payment terms and conditions. This way, you can ensure that all parties are on the same page before any problems arise and build on your work to build a positive customer relationship.
Strategy 3: Reach out to customers before the invoice is due
Chaser's research shows that the average invoice takes around 2.6 follow-ups to get a payment. Restricting your credit control activities to the time after the invoice is due can result in increased late payments and poor cash flow.
Rather than waiting for invoices to become overdue, contact customers before they are due. This gives you a chance to confirm that they are aware of the payment date and that all relevant information has been received.
Being proactive is the best way to ensure your customers pay on time. Reaching out to them before an invoice is due and providing regular updates creates transparency and builds trust in the customer-supplier relationship.
It also allows you to identify any issues that may be preventing payment quickly. Perhaps a customer needs more time or has trouble with the payment process; whatever the issue, reaching out to them before the invoice is due gives customers a chance to resolve any issues that may be preventing payment.
A polite reminder sent in advance prevents bill shock and encourages customers to pay promptly. At the same time, being proactive in your credit control strategy also allows you to build a strong relationship with your customers.
Regular contact demonstrates that your company is organized and reliable, which can lead to repeat business from loyal customers.
While implementing this strategy might seem like yet more work and resources that you need to put into your credit control process, making use of automated software such as Chaser to send automated reminders is a great way of streamlining your credit control efforts.
Using automated reminder software also ensures that all customers receive the same service level and reduces your team's workload. It introduces a level of consistency, reduces time spent on manual tasks, and significantly decreases the risk of late payments.
Strategy 4: Make it as easy as possible for your customers to pay you
Ease and convenience should always be the primary watchwords when it comes to payments. The easier it is for your customers to pay you, the faster you will receive payment.
Offering multiple payment methods allows customers to choose the most convenient option for them. This might be direct debit, credit card, PayPal, Stripe or bank transfer - whatever works for your customer and helps them pay on time is likely to improve cash flow.
According to Chaser's 2022 late payment report, incorporating alternative methods like card payments with payment links or the option to set up direct debits can significantly increase the likelihood of receiving prompt payments.
Adapting your payment requests to your customer's preferences and processes is also critical. Understanding when your clients have their payment runs, their approval process and other key information can help you ensure that your invoices are paid on time.
Finally, consider a payment portal or an online invoice system to provide customers with easy access to all the information they need to pay quickly. This reduces administrative overheads for both parties and makes it easier for customers to keep track of their payments.
Strategy 5: Implement KPIs
Key performance indicators (KPIs) are not just for your sales team. Setting KPIs for your credit control team can help ensure that all departments are working in tandem to reduce late payments.
KPIs should be tailored to the individual needs of your business and track things such as payment rate, time taken from invoice raising to receipt of payment and average number of follow-ups before an invoice is paid.
By consistently tracking important metrics such as days' sales outstanding, operational cost per collection, and the number of revised invoices, you gain valuable insights into trends and potential issues affecting the efficiency and cost-effectiveness of your receivables process.
It's almost impossible for you to assess the effectiveness of your credit control process if you don't have any data to work with. Regularly tracking these KPIs will help you understand where improvements need to be made and enable you to concentrate on areas that need more attention.
It's also worth setting performance targets - for example, reducing the time taken from invoice raising to receipt of payment by a certain percentage. This provides a measurable goal for your team to work towards and helps ensure that they are always striving to improve the efficiency of your credit control process.
Chaser's KPI tracker makes a comprehensive basis for tracking KPIs without needing to spend time creating your own spreadsheet and can help you keep on top of your receivables process.
Working proactively to overcome the penalties of late payments
By implementing these five strategies, you can ensure that your customers pay promptly and improve cash flow without sacrificing customer relationships.
An effective credit control policy provides the foundation for strong customer relationships and helps you to maintain positive cash flow. Working proactively to contact customers before an invoice is due and providing easy ways to pay will help you encourage prompt payment.
Credit checks can also help you identify which customers are more likely to pay late and mitigate any potential risks. A full understanding of your customer’s financial health will enable you to make informed decisions on extending credit terms and setting appropriate payment expectations.
By keeping track of key performance indicators, you can gain valuable insights that will allow you to refine your credit control policy and maximize the efficiency of your business.
Offering easy and adaptable payment options, automating your credit control process and understanding your customer’s payment processes are all great ways to make it easier for customers to pay you on time.
Implementing automated tools such as Chaser for credit control can make the process even more efficient and reduce manual overheads, allowing you to reap the rewards of prompt payments.
To learn more about how Chaser can help you create an effective credit control strategy, contact the Chaser team today or sign up for your no-obligation 14-day free trial.
