Cash is not a given. It not an automatic result that always follows delivery or completion of a job or project. It will not just jump into your bank account. It has to be requested, tracked, chased, captured and then banked. You need to have a brilliant process in place to ensure you turn all your business into something that pays the bills every month.
The Bank of England estimates that only one in two companies agree their payment terms in writing. It's just good business practice to let customers know when you expect payment.
As an invoice finance company that solely focuses on helping SME's grow by turning invoices into cash, we've got loads of experience in collecting money from customers.
Below is our simple FIVE step process to success:
I know this sounds obvious, but it's really important you only deal with companies that will be around to pay you in 30 days' time. Always credit check customers at the start of the trading relationship then review at regular intervals, especially if they place a large order or request different payment terms.
A leading credit information supplier has calculated that more than 90% of companies grant credit without first obtaining a credit reference. There are several websites you can use to help you to gauge the credit worthiness of your customers. The key elements to look for are:
- Gearing (average is 50% to 90%; high is above 90% and should make you think)
- Net worth (take caution with a negative net worth)
- Liquidity ratio, acid test, quick ratio (average risk is 0.75 to 1.25; high risk is under 0.75)
- Current ratio (average risk is 1.0 to1.5 and a high risk is anything below 1.0)
- Debtor day sales outstanding (average is 55 to 85 days; high is over 85 days)
- Creditor day sales outstanding (average is 45 to 60 days; high is over 60 days)
I know this sounds silly and you always do this, but make sure you do it promptly and send to the correct person or department. The invoice should be sent as soon as the goods or services have been delivered. Make sure your payment terms are included clearly, including how to pay - e.g. your bank details and all legal information.
If it's a significant amount, check the invoice has arrived and is in the process to be authorised and paid on time. Better to find out early that it hasn't been delivered.
Always aim to give 30 days and agree this before you supply the goods. On any other terms, give yourself the option to charge more (for late payments) or give a discount for early payment.
If you can afford to, give a small incentive to pay within 14 days. This could be a small percentage discount or a £ value - depending on your transaction value. The aim is to give a small incentive and, more importantly, a reason to chase up early.
You'll be doing your customer a favour and ensure your bills get paid before others.
If the client missed the early payment discount or you don't offer a discount, phone the client 20 days into the cycle to ensure you'll get paid on time. Make sure you have the order details to hand and that you speak to the correct person at the company.
If possible, at just over the 30 days phone the customer again to find out when you'll get payment and what the delay was. For significant invoices always try to make a note of your call - it helps to refer back in future conversation. It also shows that you as a company are on the ball and very professional.
Once the 30 days has passed, try to escalate your contact, if you haven't already spoken to them.
Ensure you always produce a statement of money paid and money owing; this should also show your payment terms and highlight any that are overdue.
Also, produce a series of standard letters to chase-up outstanding invoices, these can be posted or emailed. These should be
(i) Reminder letter, politely requesting overdue payment is made
(ii) Demand letter, strongly emphasising that payment must be made within 7 days to avoid the risk of legal action and increased costs and interest charges
(iii) Letter before legal action, explaining that you'll pass the matter on to to your solicitors
It's always important to keep a great working relationship with all departments of your customer's company - so be polite, even if the person you are talking to isn't being helpful.
Like magicians, invoice finance experts can turn your invoices into cash, normally on the same day you issue them - advancing you around 85% of the value. They then collect the money on your behalf and pay the remaining 15% to you, less their fees (normally around 0.5% to 1.5% depending on your size).
Invoice finance (or factoring) companies sometimes get a bad reputation as a last resort for desperate companies but increasingly are being used as quicker, more flexible alternative to the overdraft, really helping SMEs grow.
Even better, it can be completely independent of your banking relationship - so you don't need all your financial eggs in one basket.
Find out more about Hitachi Capital Invoice Finance
This fabulous photo is courtesy of Peter Roome