As we embark on a new calendar year, it is a great time to take stock on how you manage late payments – and how you can better avoid them.
The pandemic is likely having an effect on how your customers pay. While statistically the UK is not seeing a spike in insolvencies that may be expected, it is clear that many firms are masking how bad their financial situation is. The smart money is on that spike coming this summer, but before it you will inevitably start seeing companies managing their cashflow – which means late payments, partial payments and non-payment of invoices.
We reported in 2016 on research from the insolvency and restructuring trade body, R3, that at least one fifth of UK corporate insolvencies in 2015 year were caused by late payments or insolvency of another company. How did late payment influence this?
• Late payments for goods were the major cause of 23% of company insolvencies in 2015
• In 20% of cases, it was due to the failure of a supplier or customer.
Late payments are certainly a sign of problems within a customer’s business. Their problems could then become yours.
Andrew Tate, president of R3, has said: “A business can have a great product and great staff, but if it doesn’t get paid for what it sells, or if it is over-reliant on a supplier or a customer, things can go wrong very quickly.
“On the surface, late payment or the failure of another company can seem like factors outside a business’ control, but there are plenty of steps a business can take to reduce the risks posed by its supply chain and customer base.”
Collection management strategies are often complicated and ineffective. Add a pandemic into the mix, and those strategies need to be flexible, agile and reviewed frequently. We often see a combination of:
• poor use of communication channels
• weak and unresponsive processes
• poor visibility of interactions with the customer
• lack of strategy to identify and adapt to customer, economic and sector changes.
For many businesses late payments become accepted as another operating cost. But they signal risk, and require positive action. Big businesses will be incorporating automation, prediction, advanced analytics and artificial intelligence into their management tools to identify the risk. Trade credit insurers also assess industry trends as well as individual company data to assess a business’s credit position more accurately. Many SMEs, however, will be looking at the debtor ledger to identify late payers, but will they be looking at their industry, the trends and signals of risk that indicate business creditworthiness? For most, no.
To compound this, in a pandemic even traditionally effective processes that business use to identify risk may not work well. So what tools do you have at your disposal?
a) Get to know your customer. Understand the sector, risk level, and what credit has been offered.
b) Manage your cashflow. Review your payment schedules with key customers. Pick up the phone and speak with them. Emails don’t build relationships – and with so many finance teams working remotely, mobile phone numbers are all the more important. Perhaps agree price discounts with large firms in an effort to reduce their 60/90 day credit terms, so you get better cashflow even though you’re discounting.
c) Invoice correctly and promptly. Dating you invoices on first day of the month can often turn an invoice into a 60-day rather than 30-day invoice, so understand how your customers pay and bill them accordingly. Maintain your customer documentation and notes on your CRM, and make sure you know those details are correct. If you have large customers and they have vendor portals, make sure you know them inside and out, and login and check invoice status frequently.
d) Chase payment immediately so this becomes routine and expected. Chasing can help avoid a lot of issues, and helps keep your business front on mind for your customer. Accounts payable teams are people, and they can be empathetic, loyal and helpful when they get to know how you operate.
e) Outsource collection of debts. If you don’t have the internal resource then invoice financing or factoring are an option, but they can be costly. We have an article that talks a little more about these options and tips for avoiding late payments here. Of course, these options are no excuse for not being diligent when you onboard a new customer.
f) Get trade credit insurance. We include it last on this list, not because that’s where it comes in importance, but because it sits comfortably with all of the above. There will be a handful of trade credit insurance options that suit your business and your customers. With a policy in place you’ll know that The Channel Partnership and our trade credit insurers are reviewing and reporting on risk – down to individual customer level. One large customer insolvency could spell disaster, but that customer could be insured individually. If you are interested in protecting your business against corporate insolvencies and liquidations, find out more about our trade credit insurance options.
A final word from us. We never sell a policy to a customer if it’s not right for them. In fact, we go the extra mile and review what you need and make recommendations even when we know trade credit insurance is not right for you. So it’s always worth a call to The Channel Partnership to get good, straightforward advice – for free. Call 01275 817 320.