Cash flow is and always has been a core building block for success in business. In order to stay afloat and forecast for the future, more money should be coming in than going out. It sounds like a no-brainer – if only it were always this simple.
Positive cash flow fuels everything from salaries and supplier costs to the day-to-day bills that accumulate from running a business. Beyond keeping the lights on and the bills paid, the financial health of your company will impact your ability to expand.
So, what happens when you’re in the middle of a global pandemic and your customers won’t pay? Debt recovery is not an option that anyone running a business should ever have to call upon – unfortunately, it’s one that has proved critical in maintaining positive cash flow for companies ranging in size and sector.
Before it gets to that stage, there are a few steps you can take to tackle cash flow problems and keep your customers from leaving.
The key component of an effective cash flow management strategy is forward planning. If a customer has failed to pay on time in the past, it may make sense to get on the front foot and negotiate a shorter payment term for that client. Whatever terms you do settle on, make sure these are clearly communicated in advance, leaving no room for interpretation. Your invoice policy should specify the exact length of time a customer has to pay after an invoice has been issued, along with the consequences of late payment.
Try offering a perk to all clients who pay early as part of your terms. It could come in the form of a discount – for example, a percentage off your service fee for clients who pay upfront. Not all customers will opt for this, but it does offer an incentive that could potentially help to keep your business afloat should other clients prove to be bad payers.
If excuses are commonplace with the customer, pre-empt these to prevent them from holding up. For example, asking where to send the invoice and who to copy in before issuing it will render the age old “sent to the wrong person” excuse invalid. Ask in a friendly tone to come across as helpful rather than antagonising – the last thing you want is to ruffle their feathers before they’ve had a chance to pay.
Companies whose product or service requires substantial financial investment or effort before they deliver are well within their rights to ask for a deposit or milestone payment from their customers. You may see this from marketing agencies and design firms who wish to protect their time from being wasted by asking for upfront payment to justify the costs in delivery. Naturally, not all clients will be willing to pay in advance. However, if your customer has failed to pay on time in the past and the quality of product/service has never failed to meet the standard expected, this might be the best route to get your customer on solid footing.
Court proceedings should be the last and final resort to late payments. At the end of the day, neither party wants it to get to this stage as it can be costly and time-consuming. Keep an eye out for the common signs that can indicate a reluctance to pay or a history of poor credit. A prime example of this is complaints early on, as these could form the basis of a contract dispute that the customer uses as a basis for their refusal to pay. If a problem is raised, how can you solve it? Evidence of attempts to rectify issues early will play in your favour in the long-term, as much as it may pain you in the short term.
If possible, use technology to your advantage to help facilitate payment for your customers. If your business is predominantly online, offering a digital payment solution that is simple to use and allows for quick payments will encourage a customer to get it off their list in a matter of clicks. Remember, not all customers will be digitally-savvy: allowing for payments through multiple methods will ensure all customers are accommodated for.
In some cases, the cause of a late payment can stem from poor financial health of the debtor. If this is the case, flexibility may encourage the debtor to make payments. Take an understanding tone and offer to set up a repayment plan that works for them to maintain the relationship while getting on top of your accounts.
If your customer informs you that they are bankrupt or the company is in liquidation, the debt is likely to be stricken off. Depending on the circumstances, may still be able to recover the debt through a payment plan. Make sure to consult with a lawyer before threatening further action if this is the case,
The law states that you have a statutory right to add interest to unpaid invoices (8% over the Bank of England base rate per day for B2B transactions) and claim debt-recovery costs should it get to this stage. However, if you do choose to add interest, always give your customers notice of this before sending through your new invoice. Often, this will prompt a debtor to pay in order to avoid the additional fees.
No one responds well to threats. Unless your debtor is repeatedly ignoring all attempts to contact them, try to remain as courteous as possible when chasing payment. For example, rather than asking why the debt is still outstanding or the number of days that have passed since the invoice was issued, ask if any problems are delaying the payment. There could be underlying reasons that haven’t been communicated.
At a certain point, debt recovery will begin to eclipse your daily workload. Before it gets to this stage, contact an expert legal team to handle the matter on your behalf. In many cases, a letter before action can prompt immediate payment as it signals to customers a commitment to the consequences that were previously outlined.
At 360 Business Law, we regularly advise businesses of all sizes on cash flow management and the challenges of chasing debtors. We’re also no stranger to payment disputes; our team brings considerable experience in representing commercial clients to recover debts and settle matters quickly and efficiently.
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