10 TIPS for SMEs to get paid faster
About the Author:
Jay Changlani
Director at Orb360
Jay is a Chartered Accountant and a Director of Orb360, Chartered Accounting firm based in Auckland and Wellington. Jay has over 12 years of Accounting, forensic accounting and tax experience.
Steady, reliable cash flow is crucial for the survival of any small business – so taking steps to ensure your customers pay promptly should be a key priority.
When your clients consistently pay on time, you’ll avoid the dreaded “feast or famine” cycle. You’ll be able to pay your vendors, suppliers, and employees on time – and not least of all, yourself.
In difficult financial times, you will need to maintain a balance between these objectives and helping your customers to meet their obligations and stay in business. This does not mean being soft on those who clearly can pay you. Make sure that you are in a position to collect debts as soon as you can, while being reasonable with those who need extra time to pay.
Implement these ten tips now to put yourself in a strong position to collect your debts as quickly as possible:
1. Provide payment terms up front
Before you start working with any new client, always provide your terms in writing. Clearly state your rates, payment due dates, and policies for late payment – including any fees incurred on balances owing.
2. Invoice immediately
If you’re currently preparing your invoices manually, consider switching over to an accounting system with automated billing. You’ll never forget to invoice a client, and you’ll eliminate errors as you save time. The first time a client is billed make sure the contact information on your invoice is complete and accurate to avoid excuses and processing delays.
3. Follow up
Call your customer immediately when a payment is past due. Ask for the status of the invoice and if there’s anything you can do to help speed up payment. Sometimes a simple change, like including a purchase order number on the invoice, can speed up processing.
4. Reduce terms
Standard terms in New Zealand are 30 days, but most companies pay accounts on the 20th of every month. There is, however, nothing stopping you from asking for payment sooner. Some business owners make payment due within seven or ten days. Others stipulate payment is due upon receipt of invoice. Always bill before the end of the month if your terms would allow an extra month to pay as a result of billing in the following month.
5. Reward early payers
Consider offering customers a 2% discount when they pay their invoice within ten days. In this scenario, a $1,000 invoice would be reduced to $980 – not a huge loss for you, but an attractive cash-saving incentive for your customers.
6. Get paid upfront
Collect a partial deposit – or the entire amount in full – before you provide a product or service to your customers.
7. Go mobile
Forego invoicing altogether by having your customers pay on the spot with mobile debit and/or credit payments.
8. Charge interest
As part of your terms, specify that if a client’s payment is past due, interest will be charged and will be added onto the total until funds are received in full. You would not normally enforce this for customers who tend to keep their accounts up to date. It can be persuasive when necessary. Also, after you have made reasonable efforts to pull in the debt and promises continue to be broken, it will be enforceable when debt collectors need to become involved.
9. Suspend service
Stop your supply of products or services until you receive payment. With this tactic you’ll avoid the accumulation of an even greater loss with a consistently late or non-paying client.
10. Stay on top of AR
Monitor your accounts receivable on a weekly basis so you can act fast if a customer hasn’t paid on time. An AR aging report can help you easily track outstanding invoices right in your accounting software - or create an Excel report you can track manually, if you prefer.
Final thoughts
Perhaps the most important (bonus) tip for encouraging prompt payment is excellent communication.
When you follow up on a late invoice, be prepared to explain why it’s important to receive timely payment in order to run your business effectively. Ask when you can expect payment and agree on a date.
If the money still isn’t forthcoming, offer to negotiate a payment schedule as a next-to-last option - before you have no choice but to contact a collection agency.
Director
Orb360
09 390 0104
Related Articles
As we head into 2021, consumer facing organisations in New Zealand may be lagging behind a dramatic shift in consumer behaviour.