Late Payment Pitfalls: Keep Your Business Healthy by Getting Paid Fast

Posted 04 May by Blaine Bertsch in Budget, Cash Flow, Entrepreneur, Small Business

Getting paid on time is a critical issue that affects businesses globally, as well as affecting job creation, local and national economics, banking procedures, and most importantly, individual workers every day – some of whom are still trying to recover from the most recent recessionary period.

The Issue with Late Payments

Let’s start with what constitutes an on-time payment: An on-time payment is the transfer money, check, debit, credit or bank transfer in exchange for your providing goods and/or services. The payer makes the payment and the payee receives the payment.

According to a report in 2016, 33% of businesses indicate that not getting paid in time threatens the survival of the company and many state that if they were paid faster, they could hire more employees.

Startlingly, the majority of respondents to the EPR Survey “believe that the withholding of payments after due date is intentional.”

So what can you do to protect your business while continuing to grow and profit? You need to start by:

• Understanding the problem late payments create for your business

• Embracing the importance of accurate cash flow projections, and finally,

• Taking action to safeguard your business against late payments and surprises

• Return the favor by promptly paying your suppliers

Late Payments Impact Your Business Every Time They Occur

Unexpected delays in payments can have a catastrophic affect on businesses that have little or no cash reserves or credit to rely on. For businesses that are paid based on invoicing for delivered goods or services, payment delays are bound to happen. Nonchalantly regarding your receivables as “better late than never” could mean life or death to your organization and your dreams of business ownership.

If you use an invoicing system in your business, you know how important it is to get paid on time. Simple payment delays could cost you more than just a few dollars; payment delays can happen at any time, often out of anyone’s control.

A delay in payment can occur for many reasons. It can be as simple as someone being on holiday when their approval is required to sign off on the invoice. More complicated reasons include a change in direction for the overall plan of which you are a part. Finally, motivation to pay invoices is a key issue that should also be considered. Whether your invoice is big or small, the impact on you and your business can be significant.

From your perspective, the reason for the delay does not change how your business reacts to non-payment. Staff pay checks, utility bills, material bills and other costs of business operation continue as per usual, regardless of whether or not you have been paid.

This fact represents an unpleasant side to business ownership that many individuals indicate they had no practical or theoretical knowledge of before opening their doors for businesses. The disillusionment can be staggering, and then ramifications of non-payment cause businesses to fold every year.

You need to have cash reserves. It’s also critical to know that the cash balance you have in your bank account today can be misleading. If you don’t account for payments that will be withdrawn in the coming days and weeks from checks clearing, auto-payments and regular expenses, you may believe you have much more cash on hand to work with then you actually do.

How late deliverables slow down your payments

Sometimes the cause of late payments is a direct result of your actions – or often, inaction. Delivering services or products to your customers late can have more than an effect on your reputation; late delivery can cause you a serious cash flow problem. This is a common issue in small business.

Although sometimes it’s just a case of slower productivity or honest mistakes, decisions that delay deliverables are often made with good intentions and need to be conscientiously examined to find a solution that help every individual that touches a product ensure that they remain focused on delivery to the customer.

The problem with slow delivery is compounded when there are delays on your customers side as well. These issues, of course, are out of your control but fast delivery and prompt invoicing can help mitigate the problem.

The big problem with slow deliverables

Just because something is delayed, doesn’t necessarily mean it’s late. In these cases other tasks often become the priority but the negative affects of that decision can ripple through your business.

The danger comes when a big deliverable doesn’t go out as scheduled, resulting in slow payment. Often, the delay in payment isn’t discovered until money doesn’t arrive when expected.

When you are able to speed up invoicing and payment based on faster delivery, you have an opportunity to improve your cash flow. Meanwhile deliveries that are delayed can have serious negative impact on your cash and may be easily avoided.

Speed up invoicing and payment based on faster delivery, you have an opportunity to improve your cash… Click To Tweet

The key to managing delivery times and your cash flow is through careful tracking. Understanding both your deliverables and your invoices in relation to each other helps you predict when cash will flow into your business and identify possible issues ahead of time.

To make matters more complicated, there are often two different people in a business who are responsible for the two roles of delivery and invoicing. Even when a single person is in charge of tracking delivery as well as sending out invoices, there’s often a breakdown in identifying the affect that one has on the other.

It’s critical that you look to put a process in place that addresses tracking delivery and invoicing as parts of the same process.

Download your free report and Checklist: 21 Tactics for Getting Paid Faster

The Importance of Cash Flow Projections

It’s critical that you build and maintain accurate cash flow projections in a way that is visual and concrete – considering your cash flow is simply not enough. Map out the expected inflow and outflow of money into your business in the coming weeks and months. What expenses are on the horizon? When are you expecting customer payments and for how much?

All sorts of issues can change the dates and amounts of payments. Unexpected expenses often come as a poorly-timed surprise and can simply be missed in the flow of urgent business, so make sure that you’re updating your projections on a weekly basis.

How To Action Critical Cash Flow Projections:

• Plan your budget and know your break-even point

• Visualize what money is going in and out of your business

• Predict when money will enter and exit your bank account

• View your current and planned sales for the year

• Determine how much you plan to spend this year

Timing is important. If (when) your business is hit with an unexpected delay in the inflow of accounts receivable, you may not be able to pay your bills. The best case scenario results in angry creditors and suppliers who may enact a financial penalty. Worst case scenario is your bankrupt business that leaves you bereft of any personal savings that you may have contributed.

Reducing the Risk to Your Business

Once you have a handle on these important aspects of your business, you can take action to protect your business and plan for growth. Ask yourself these questions:

1. Should I look to extend my bank loan while my business is profitable to protect my company?

2. Can I branch out sales to different markets, different countries?

3. Should I consider exploring new services or products to offer our customers?

4. Is it a good time to expand based on cash flow and sales forecast?

5. What core needs and expenses are related to expansion?

6. Do I need to hire more staff? Is more space required?

7. When is a good time to reinvest money from my business?

The list of questions can and should seem endless. The good news is that you don’t need to have all the answers. Asking yourself opportunity-driven questions about your business and its cash flow puts you in a growth mindset.

Asking yourself opportunity-driven questions about your business and its cash flow puts you in a… Click To Tweet

Having worked through your cash flow in order to more effectively manage it means that when opportunities arise you stand a much better chance of recognizing their their true potential. You now have a deep understanding of the current state of your business, coupled with your available flexibility and the financial backing that you’d require to execute a strategic plan.

By maintaining up-to-date cash flow projections you’re better prepared to identify shortfalls and give yourself time to react. With a little pre-planning, you can work toward having cash reserves ready so that you can take action, insure against risk and loss, and continue to grow your business.

Know These Key Factors in Your Cash Flow:

1. How much cash is in your bank account today?

This is your starting point. If you appear to have ample reserves, you may be prepared to weather a storm. Even if you have cash in the bank, it’s critical that you move on to the next step and figure out if that cash will be available to you when you need it most!

2. What payments do you need to make from your account in the near term? Is the cash available to make those payments?

Payroll is likely. Rent, insurance, utilities. Are any of your outgoing payments automatically deducted from your account?

It can be easy to forget about payments you don’t make every month or those that are made automatically. What about one-time payments for purchasing goods, equipment or paying contractors?

Are there any large expenses that are less frequent, like a once-per-year charge for insurance, that may be scheduled for payment in the near term?

3. What cash are you expecting to flow into the business in the near term?

Have you sent out any invoices that you expect to be paid? Consider when that cash is likely to enter your account (as opposed to when the payment date is). Is there any other cash rolling in over the short term that might help you bridge the gap?

4. What is your expected cash flow over the next three months?

Even though your cash flow crunch may be just a short-term blip, it’s important to know how the inflow and outflow of cash looks over the next few months. In a worst-case scenario, you may need to approach your bank for short-term financing and they will want to see a longer term plan that is concrete and detailed.

Tips for Dealing with Late Payments

Even Hammurabai’s Code deals with debts and their payment. Here are some quick tips for managing a cash flow crunch or for generally improving your cash flow management processes:

1. The Contract and Terms

Speeding up your payments starts with your contract with the client. Here’s where you detail essential factors in your payment terms. Here are a few concepts to practice then place in your negotiation arsenal:

• Request a payment up front
• Progress payments at key stages of delivery
• Detail timelines for approval on their side to avoid delays
• Add late payment penalties

2. Project Management and Invoicing

• Push your team to deliver early so that you can invoice faster
• Encourage early completion and delivery
• Pay close attention to delivery requirements
• Stay on top of approval process and encourage prompt sign-off

3. Follow-up with Your Customer

• Contact them immediately if a payment is late
• Find out why payment is delayed to help avoid in the future

4. Options for a Cash Flow Crunch

• Speed up payment from your client by offering a discount for timely payment
• Arrange some temporary credit with your bank (they like lots of lead time)
• Defer outgoing payments when possible

Once you get your immediate cash flow under control, make sure you continue to track your cash ins and outs as well as build out projections on an ongoing basis. Identifying potential problems early gives you more options to resolve the problem and puts less stress on you and your business.

21 tactics for getting paid faster

Interested in more information about cash flow management, sales forecasting, and how to visually structure these and other elements to grow your business? Check out Dryrun on the web or chat us up via email at hello@dryrun.com

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