How much do late payments cost your business?

When your cash is locked away with your clients, you are unable to grow and move forward. Poor Cashflow is actually responsible to a large percent, for the failure of most SMEs. Unfortunately, it is ridiculously common. Invoices are never paid on time.

The downside to this is obvious. When you do not have money to spend, then your business is not going anywhere.

You cannot pay your workers; you cannot pay your bills, nor can you settle the rent. You might just get evicted.

Well, for some businesses, they manage to get some money coming in, but not all of their money. This totally cripples and stifles their ability to stay innovative and ahead of the competition.

When most of your cash flow is in people’s hands, it is up to them to decide when you will get paid and ‘if’ you will get paid. Your destiny is in their hands, which is a totally horrible way to conduct business.

You might be wondering whether stress is a cost, and yes, it is. When you are stressed, you are unmotivated as a business owner, and neither are you innovative. This is a real-life cost to you personally and to your business as well.

This stress will affect your quality of life and give you some physical symptoms that will interfere with your concentration and sleep. In the end, it will stifle your energy to do your business and to keep it growing.

Furthermore, stress to the business owner will impact the employees negatively. When the working conditions are not conducive, production deteriorates and causes the business to suffer and make losses.

In the end, stress is detrimental to the success and growth of your business. It is a significant loss to you and the employees as well.

This is yet another lousy cost associated with late payments. As a business, you must spend a lot more money and time trying to recoup a bad debt you may have written off.

For example, if your business had a profit margin of 20% before the bad debt, and then you write off a debt of around £5,000, it will require you to make new revenue and sales in the amount of £25,000 to recoup the loss you made.

This takes time, and it is way too much headache for you to deal with.

This is an ignored cost when it comes to considering how much late payments cost your business. Most companies will be required to borrow money to bridge any gaps created by late payments.

The money you borrow from, let’s say, the bank or any other financial institution, will be borrowed at a specific interest rate, which means that the interest you pay for that loan is a late payment cost accrued by the business.

The opportunity cost of chasing a late payment is very real. Suppose you happen to be diverting your resources in order to chase some invoices. In that case, your business is undoubtedly losing out on sales, productive activities, and many other activities they would otherwise be doing to generate revenue for the business.

You should think about the amount of money you would have earned from sales if you had not been calling and emailing and visiting the client for your payment.

Whatever you are doing BECAUSE of the late payment. That is your opportunity cost.

It is compounded, such that it is the additional cost to the amount you are already spending on the employee to chase the overdue bills.

If things are only getting worse and you have debtors who are not paying, you may be forced to act against them. These are additional costs that will be accrued in terms of paying lawyers, paying debt collection agencies, and anyone else involved in recovering the money.

One of the biggest reasons for late payments is the benefit of cash flow. Your clients would love to keep their cash flow in their business; hence they make their payments late. They would wish to keep the money to themselves instead of paying it out to you.

This is another reason why businesses will opt to pay their invoices late. When dealing with a large company, it is not the owner’s responsibility to pay invoices, but a department is in charge of this.

Again, the payment process may involve many departments and people such as purchasing department, finance, and payments. All of them must append their signatures and investigate the invoice before payment.

This may take some time and the reason why they take way too long to pay out an invoice.

Not all clients will be open to this. Do not try to start negotiating with all your clients at once. Not only will this take too much time, but it will distract you from concentrating on your business.

Choose the clients who have a hard time paying your invoices, and find out whether they are willing to change the payment terms to help both of you in the long run.

With such clients, you could introduce piecemeal payment procedures, where they pay a certain amount on specific date to ensure that they clear their bill within the stipulated period, such as 30 days.

You could also offer them some incentives if they pay on time, such as 5% off on the next contract, etc.

With each negotiation, ensure that you learn something from it and apply it in the next one.

This is always a good idea. The payment arrangements must be part of the initial contract negotiations, especially with new clients.

Large companies will always require a more extended payment period of between 90 and 120 days. If this is unacceptable to your company, you’d rather miss out on the business than have your money tied up for the next 3 – 4 months, which is a very long time for an SME.

But, what you could do to accommodate them is to request a deposit of the total amount initially, before the contract starts, and the rest can be paid within their timetable of payments.

If this is unacceptable with them, then you may want to weigh the options of whether you can wait that long or not.

But before any deliveries are made, ensure that you have both understood the payment terms in detail and these have been included in the contract.

This is very important; for a new client, let them understand that you cannot wait more than 30 days for an invoice to be paid.

Do not threaten to withdraw the business; instead, develop a plan that will benefit both of you.

At the end of the day, remember that you are still in business and you need clients. Do not be too strict and rigid that you are not willing to listen to your client.

If they honestly cannot pay in the stipulated time, and you can wait for the money, then go ahead and allow them to buy from you.

They could be a start-up that is just trying to get their foot off the ground, which means that they do not have much in terms of cash flow, but they show lots of promise, so, go ahead and support them in this way, you may even end up with a long-term client.