How long should you have to wait for payment? The ideal answer, of course, would be: “Not at all.”
But only a lucky few businesses can operate on a cash-only basis. Most have to offer trade credit to be competitive, and the wait for payment puts pressure on cash flow. Late payments create cash flow stress, tie up your money in accounts receivable, and mean it’s not available for use as working capital or to pay suppliers, wages, super and tax.
Maybe you find yourself asking, “How do I know when I’ve waited too long?” The simple answer is that as soon as the payment is overdue, it’s time to act. You should be using credit reports and past payment history to set payment terms for each customer, and be particularly scrupulous when it comes to new customers with no payment history. It can be all too tempting to say yes to the sales without fully appreciating the impact on cash flow, so setting credit limits is a critical first step.
What’s normal?
Standard terms may be 14 or 28 days, but Dun & Bradstreet’s Australian Trade Payments Analysis shows late payment is actually the norm.
In fact, in the three months to the end of June 2016, businesses took 44.9 days on average to settle their invoices.
This was below the 49.2 days recorded in the same quarter in 2015, but slightly up from the March quarter of 2016, so the trend line may be turning up again.
And remember – 44.9 days is an average. While 68 per cent of businesses settled their accounts within 30 days, 24 per cent took 31 to 60 days. And the remainder were a lot slower, including 1 per cent who waited more than 121 days to pay up.
Payment times also varied by state and by sector. ACT businesses were the slowest, taking 59.4 days, while Tasmanians were the fastest, at 41.8 days. Among communications companies, the payment lag shot up from 49.9 days to 56.4.
When does your business need to act?
Take action as soon as payment is late. If you gave 30-day terms, your collections department should call on day 31 and remind your customer that you expect payment on time. One or two days late may be within your tolerance, but if you let it go for anything beyond a week you are sending a message that late payment doesn’t matter that much. Then the lag stretches out even longer and suddenly 30 days has turned into 60.
What about my collections department?
Your collections staff and the processes they follow are crucial. They need to be effective, getting on the phone straight away, and politely but assertively confirm balances and ask for payment. If the debtor still doesn’t respond, legal action is an option, and you advisers can assist with this.
Make sure the team has the incentives and the support they need to do this difficult work. If you’ve done everything reasonable, and your collections people still aren’t pulling in the cash, it may be time to review their processes and/or positions.
Should I give any of my customers more rope?
Your most important customers or clients might be worth some flexibility. If a customer has been generally reliable, you could negotiate a special arrangement that allows them extra time to pay. If not, then assess if your business may do without their custom. All costs considered, the margins on your sales may not cover the accounts receivable costs and the loss of time and focus caused by managing these debtors.
You might also be prepared to work with a new customer if you think they have a big future and you can grow with them. If a key client hits a rough spot, you might give them some extra time, knowing they might return the favour one day.
You could offer discounts for payment in advance, but calculate carefully the time value of money to make sure you’re not too generous.
On the other hand, a customer who needs your inputs to develop their product, and whose own payday is some way off, would appreciate some extra time. But make sure you add the value of that time into your pricing so you’re not out of pocket in the long run.
How do I know I’ve waited long enough?
Major clients usually know how crucial they are to you, and can take advantage of your relative weakness by stringing out payments far longer than is fair. If you feel you’re being exploited, it’s time to reassess the relationship.
As in life generally, it can come down to an instinct – if you feel they are giving you the ‘run around’ then enough may be enough and an honest conversation may be what is required.
In extreme cases, if a customer has been guilty of late payment before, you can put them on Cash on Delivery terms. But this is probably a sign that their business is in trouble and you need to work out whether it’s still worth trading with them.
You have taken all reasonable steps to manage cash flow. What other solutions are there?
In such circumstances invoice financing can provide a solution. Invoice Finance provides you access to the cash from your sale upfront when you need it, to help preserve your cash flow whilst at the same time allowing you to continue offering competitive terms of trade with your customers. You can invest that cash into improving and expanding your business straight away.
