Getting late payments under control

Many NZ small businesses are finding late payment to be a major issue. A recent survey from payment provider, GoCardless, found that 62% of New Zealand businesses believe they’re losing money to late payments – with some reporting average estimated losses of more than $10,000 each month.

Let’s look at what late payment means for your cashflow and working capital, and what steps you can take to improve payment times and your overall cash position.

Why is late payment such a problem?

Your financial health as a small business depends on your ability to bring in stable income and to keep your costs to a minimum. 

When payments arrive on time your cashflow is boosted, which provides the working capital you need to operate and - hopefully - leaves enough surplus to deliver a profit. 

When payment doesn’t arrive on time, this whole financial process breaks down, leaving you with no cash in the bank, outstanding debts to pay and dwindling capital resources.

The aim of your accounts receivable function is to collect payments from customers as quickly as possible. You might see references to Debtor Days or Accounts Receivable Days - this measures how efficiently your business is able to collect its receivables. The lower your Debtor Days value, the quicker your customers are paying their bills. 

The sooner that income is received the better, helping you stay in a positive cash flow position and access the liquid capital needed to trade, expand and innovate. 

Here are four key ways to speed up the collection of payments:

1. Invoice on time using e-invoicing

Use e-invoicing (electronic invoicing), and the automation tools in your accounting software, to generate and send invoices as soon as the job is complete. E-invoicing systems reduce potential human keying errors, are delivered instantly and can be integrated with payment portals for a faster, smoother and more professional billing process.

2. Offer multiple ways to pay

Customers are more likely to pay when you make that process as easy as possible. Offer a range of payment options directly on the invoice, such as payment gateways (Stripe, PayPal etc), credit/debit card processing and direct bank-to-bank instant transfers. Reducing friction drastically increases the speed of collection.

3. Break up projects into multiple invoices

Instead of waiting until the very end of the project before sending your invoice, consider a deposit upfront and progress payments upon reaching project milestones. This strategy speeds up cash inflow throughout the project, giving you a stable flow of revenue that boosts your cashflow and your available working capital.

4. Run an efficient credit control function

What if you're doing all this and payments are still coming in late? Ensure you have a strict debtor management plan in place. This means setting clear payment terms from the beginning and being systematic about chasing late payments if due dates are missed. Regular monitoring of aged debt helps you to quickly identify any overdue accounts and take decisive action, which could include using a collection agency or legal escalation.

Faster payments keep cash flowing into your business, keeping the company’s financial health in check and helping you mitigate some of the current economic challenges. 

If you're feeling overwhelmed by your debtor management, talk to us to see what options may work for you.