Your cash flow depends on customers paying on time.
If you’re a small business struggling with late-payers, you’re not alone. There are a number of strategies you can employ to reduce the average number of days it takes to receive payment. We’ve listed these strategies below. You’ll find that it will probably take a combination of these strategies to get your average payment days down to your target.
Before you go any further, work out how many days on average it takes customers to pay (if you haven’t already).
Average Total Debtors ÷ Total Sales x Days Sales Were Across
For an example, say your beginning debtors for one month were $35,000 and your closing debtors were $45,000. That is an average of $40,000. Your total sales for the month (31 days) were $25,000.
$40,000 ÷ $25,000 x 31 = 49.6 days
If you want to bring this down to a target of 30 days, here are some strategies you can use:
Develop a clear payment policy
You can include payment terms in your contracts and discuss them before providing any goods or services to customers, so they know what to expect. When the customer is clear with what’s expected and they’ve agreed to the policy in writing, they are more likely to commit to paying on time.
Offer a discount for on-time payments
You could offer a discount as an incentive for customers to pay on-time. For some businesses, having discounted but timely payments may be better for cash flow than having full payments made late. Ensure that it works for your cash flow, and that you don’t offer a discount that you can’t afford to sustain.
Have a consistent process for debt collection
Be consistent with your late-payers. Make sure you set a process for yourself, or your accounts team, and follow it. For example, following up could involve the following steps:
- a phone call as soon as the invoice is overdue
- a letter four days later
- a personal visit three days after that
- referral to a debt collection agency two days later
Use automated debt collection apps
Don’t enjoy sending debt collection emails? If you use Xero to invoice your customers, you can use apps such as Chaser or Debtor Daddy to send reminders and follow-up communications to late-paying customers. These apps use tried-and-tested email templates that look like your regular emails, are sent reliably, and are consistent across your customers so slow payers are all handled in exactly the same way.
Reduce your payment timeframe
Xero’s analysis of more than 1,500 small businesses shows that whether an invoice is due immediately or due in 30 days, the average payment time is two weeks after they receive the invoice. So, if you want to be paid within 30 days, you need to make your payments due within 14 days (or fewer).
Include a late payment fee
To further encourage prompt payment, consider adopting a late payment fee. For example, you could charge a further 2% as soon as payment is overdue. If you are going to include a late payment fee, you need to make this clear at the outset. Discuss the fee with customers before providing goods or services and make sure to include it in a written payment policy. Be careful to comply with the law if you wish to add a payment fee.
Referral to a debt collection agency
If you’ve taken multiple steps to remind and encourage late-payers, but you’re still struggling to be paid, you can refer outstanding payments to a debt collection agency. Although there’s a cost to involve a collection agency, you need to weigh this up against the cost to your cashflow of not using the collection agency. By sticking to this process, your average collection period should decrease. It is preferable that you set this expectation in your written payment policy.
The key is to test one or more of these methods, commit to them, and see how they affect your average collection over time. Make sure you note the dates changes were made and track your average debt collection period on a regular basis (monthly is good).
Eventually, you should start to see that these methods improve your cash flow.