Taking Control of Your Business: Getting Paid on Time

Thursday, May 29, 2014

"Cash is king". It's one of the most quoted business clichés – and I've just added to the list of users. While cash might well be king, getting paid on time is crucial to the survival of most businesses.

What worries me, as a watcher of businesses large and small, is the way that message always gets ignored.

My impression was confirmed, when I saw the latest results of a survey run each quarter by credit reporting agency, Dunn and Bradstreet. In the first three months of 2014, nearly every business reported that it was taking more than 50 days for their invoices to be paid. Last year, it was just under 50 days for most.

Among the comments collected by D&B were that 33 per cent of small businesses (less than $10m turnover) surveyed said they had a customer or supplier unable to pay them this year due to "insolvency or another reason". Nearly half (46 per cent) of small businesses said they would choose ‘supplier’ if they had to nominate a bill to miss or pay late, should they be unable to pay all their bills.

That's not the best way to run a business relationship.

From my own experience in what was once a small ASX-listed company, I saw first-hand what happens when sales are booked, but cash wasn't collected on time, or at all, and much of the pain was because our biggest customers couldn't be bothered paying and our sales director didn’t want to upset them. First, good staff have to be "let go". Second, suppliers don't get paid in time and stop providing services until they get paid upfront.

Word gets out and customers either disappear or delay payment in the hope you'll go broke and never collect the debts. And yep, that company is no longer trading.


The other side of the ledger

To avoid the sort of cash flow problems associated with delinquent payers, every business should have a clear debt collection policy for chasing overdue debts.

An unpaid account is money that is rightly yours, so asking for it shouldn't be an issue, Yet this is a task that many SMEs dread. And it isn't a task you should delay. The longer the debt is outstanding the more it will impact your cash flow and the harder it will be to collect, warns D&B. Helpfully, the agency has a shopping list of advice to help businesses keep on top of debt collections.

I spoke to a few business advisers for some more hints and tips, and their responses were remarkably consistent.


Cash flowers

Make it quite clear what your payment terms are. "I'd have terms of payment for either seven days or 14 days, but within your own operations assume you're not going to be paid for 30 days," advised Alex Tselios, publisher and start-up expert.

"You'd be shocked at the number of invoices I've received that don't have details on how to pay, or don't have an ABN. It's really important to be professional and not give anyone any excuses not to pay."

"You have to decide when it comes to getting paid that you won't let it go. Start by sending email reminders and keep following up.'

And there will also be months when you won't make much money. Christmas is a perfect example you need to be prepared for these slow times, she warned.


Big business, bad news

If you're doing business with a major company, be aware they are notoriously slow in paying suppliers and that, unfortunately, is a fact of life.

"Some big firms have three-month payment cycles and while you might need the money within the month, they do not work to your timetable – you might find you are forever chasing down payments," warned Peter Shaw, a corporate adviser at Ash Street.

You can chip away at these delaying tactics, though. Tony Kabrovski, a partner in business advisory firm HLB Mann Judd tells his clients: "you should issue invoices as soon as the job is done or the service is provided or the product is delivered so that the terms of payment start running immediately rather than at the end of the month."

Kabrovski also pointed out that there are many more technological answers to cashflow problems than there once were. For instance, even small businesses should look at using a modern cloud-based accounting system, one that connects to your bank account, so that you can track your cash-flow daily, if necessary.

And Tony has a suggestion that is even simpler: "we're finding more people are using credit card facilities and direct debits to get paid on time."

If you're savvy enough, you can tweak your system to take a leaf out of the Kogan book and get paid upfront by customers before you place orders with your supplier, and then have the products or services delivered to your clients. That way, you've cut out a lot of cashflow problems.


Factoring out

One tempting path to getting cash sooner is to factor your invoices. In other words, you're selling your trade debts to a company at a discount and letting them collect the full amount from each owing customer.

The discount that they pay will be based on their assessment on how likely your clients or customers are likely to pay them, plus their profit margin. It's a popular but expensive way to avoid hassling your customers to pay what they owe.

Running a business is difficult at the best of times. Without cash flow, though, it’s all but impossible. The suggestions above are strategies help ensure your business cash flow helps you remain solvent.