Late payment disrupts cash flow.
Cash flow is the lifeblood of any business. Without cash flow, your business will crumble.
It may seem unimportant for a small invoice to go unpaid. But, imagine a situation where this number keeps growing. How would that affect your daily operations going forward? To be blunt, it would be a disaster.
Your suppliers would have to go unpaid, your staff without salaries and even your utilities cut. Yes, that is an extreme scenario, but it is one that you could find yourself in the middle of.
Late payments can affect Cash flow is must to keep daily operations running like clockwork. It only takes late payment of a few small amounts to set you back.
In this article, we’ll talk about the ways to deal with late payments on overdue invoices. We’ll discuss whether its a good idea to charge a late fee, how to follow up on late payments and most importantly how to avoid the situation altogether.
Should You Charge A Late Payment Fee?
Chasing payments that are late can be both emotionally and physically draining. This is a total time waste that you could be spending on acquiring a new business or servicing regular paying customers. The charge of a late payment is often used as a means of pushing your customers to pay.
But, there are reasons why this could be a good idea and those that point to it being a bad one. These need to be weighed up before deciding on this additional charge.
It’s A Good Idea When..
You should realize that if a particular customer is not paying you, you are not the only one. By implementing these measures, you may convince the customer that when they do pay, you should be the first.
Stringent measures may do well to improve the status of late payments and improve your cash flow. There will be less emotional and physical stress on you and more time for you to concentrate on money-making projects.
Of course, there are also some reasons for why this late payment fee will not be as great as you might think.
It’s A Bad Idea When..
Many customers are simply bad payers. But in other instances, it may be for reasons that relate to the work that was taken by the customer. The customer is not happy with the services rendered but rather than cause a scene; they hit you where you feel it the most – your pocket.
In instances where the customer is not satisfied, adding a late payment penalty will infuriate them even further. And it will not resolve anything.
Always be completely thorough in ensuring that all the work quoted on has been fulfilled before you invoice a customer. Chances are if you have completed everything that you have said you would, there will be no problem paying for the service.
How to Follow Up on Overdue or Late Payments
Regardless of whether or not you have ensured that the invoice has been completed with all the relevant information. And you are also certain that there will be no misunderstandings, there are times that customers will still refuse to pay for a variety of different reasons.
You do need your payment on time to ensure a healthy cash flow that will keep your business operating correctly. You don’t want to irritate a potentially returning customer or damage relations with a regular client.
There are simple guidelines that you can follow that are professional and courteous.
1) Day 15 – A friendly reminder – This may be in the form of written communication or an email.
2) Day 30 – A month has passed, and still, no joy – Another written reminder or a more direct personal call is your next step.
3) Day 32-45 – Be persistent, even bordering on annoying – Call and email on repeat. Send another copy of the invoice with additional late payment charge included. Notify your client of how many days their payment is past due.
4) Day 60 – Bordering on ridiculous – Now is the time for a final firm reminder. If you feel it is time to use the services of a collections agency to ensure you receive your payment, do it. Hopefully, your customers will not let it reach this point and make a payment for the services rendered.
You might fail in your attempts to contact a customer if they have liquidated, gone into bankruptcy or even left town. If this is the case, even getting hold of them will not help. They have nothing to give.
Avoid the Problem of Late or Non-Payment in the Future
The experience of chasing late payments is not a pleasant one and can be exhausting. Take measures to prevent the occurrence in the future. Take more time to converse with your customers at the beginning of the business relationship.
Let them know from the start your expectations about payments and beat out an agreement that suits you both.
Offer incentives to persuade payments that are either made early or by the due date. Your customer will welcome any discount. Remember to offer a discount that you can afford, not one that is going to put you back in cash flow problems and create more cash flow mistakes.
Request advance payments from new customers or customers who are undertaking a once off project. Trust needs to be built between the two companies. Don’t take a complete risk on a customer you don’t know anything about.
Withholding work is another tactic you can use, but it should only be done in dire situations. Hold onto completed work if possible to ensure your payment is not received late. The materials and products are still in your possession and are owned by you until payment is received. The con to this tactic is that the customer may refuse to pay as they haven’t received the goods yet.
Non-Payments and How to Write Them Off and Why It Is A Bad Idea
Writing off non-payments is much worse for your business than you perceive. Yes, it has been affecting your cash flow, and the fact that now you have to work without the prospect of that income is even more daunting.
There are certain things to take in consideration while dealing with non-payments.
- You must remember that you have already outlawed time, money, and effort on the project. Regardless of whether or not you received payment, you still have to pay your staff and cover your overheads.
- Writing the payment off will put your financial status for that project into a negative figure which is never a good thing. The only way to recover from invoices written off is to generate more sales which require increased marketing and it will cost more money.
- It is not a good idea to write amounts off before exploring all avenues. It is a lose-lose situation for you at the end of the day.
- Late payments and bad debts can cripple your company far beyond what you could ever imagine. Especially when it isn’t just one customer who is the culprit. The best option here is to do all in your power to persuade your customers that your payments should be made on time.
- Develop a relationship with your customers from the start. If you are striking a deal with a new client or renewing a deal with an old one, negotiate and come to an agreement that is put in writing. This will ensure that there is no confusion with regards to your expected payment terms for work completed.
- There are cases where a customer just does not have any money, and any attempts to put pressure on the customer will be fruitless. However, you still have to try. In a case like this, you have to convince the customer that your payment needs to be at the top of his/her priority list when money does become available.
- Chasing late payments is a stressful business and an unpleasant experience. While it could be quite easy to resort to tactics that come across as aggressive and threatening, it is best to remain civil but remain firm. As difficult as it may be for you, the best way to ensure you receive the late payment is to remain professional at all times.
- There are laws for what to do and not to do when collecting outstanding debts. And if you cross the line, you will be on the receiving end of a lawsuit. Violation of civil rights is a serious offence that is punishable by law
The best you can do as a business is to take every measure available to you to prevent late payment of accounts. Following all the steps does not necessarily mean you will never have a customer who pays late, but you do end any cause for delays caused by confusion.
In business, you will always cross paths with difficult customers. You should know how to deal with them with the correct attitude and be able to overcome any obstacle.
Business is tough out there, and you do want your money, you don’t want to do anything that may chase a customer into the waiting arms of your competitors.
At ProfitBooks, we help you create invoices and keep a track of clients who are paying late.Create invoices with ProfitBooks