By Lee Murphy,Founder,Founder of Pandle (www.pandle.com) the cloud bookkeeping software specifically for small businesses and the self-employed.

Every year 50,000 businesses in the UK are forced to close because customers have failed to pay on time, if at all, for services provided. The late payment culture is fast becoming the norm, but it comes with a price tag with the Federation of Small Business estimating that £2.5bn is lost annually to late payers.

The collapse of construction giant Carillion earlier this year highlighted the scale of the problem, with the company accused of forcing onerous payment terms of 120-days on an army of small scale suppliers. Carillion, MPs said, showed ‘utter contempt’ for its suppliers by using them as a line of credit to shore up its balance sheet while concealing the scale of its debt.

The full extent of the damage done by Carillion’s collapse is yet to be fully realised. In 2016 the company spent £952m with local suppliers in 2016, using an extensive network of small firms. In the wake of its failure it emerged that up to 30,000 small businesses were left with unpaid bills. The long-term future of those businesses has been jeopardised simply because they had not been paid on time by a client many had presumed reliable and solvent.

Build UK, the representative organisation for the UK construction industry, claimed that in the past were contractors have failed, around 18 per cent of creditors did not survive the next five years.

Of course, Carillion is an extreme example of what can happen to an army of contractors when a big business goes bust. Nevertheless, the Carillion saga has served to highlight the late payments culture that has come to dominate UK businesses, with those at the smaller end of the commercial scale most adversely affected.

Whether you are a micro-business employing a small team of people or working as a self-employed plumber, getting paid on time is essential if you are going to keep the bank happy and your business thriving.

For a row over late payments to escalate and threaten the ongoing flow of work is a situation most business owners want to avoid. The aim must be to try and maintain a sustainable relationship.

Remember, not all late payers are cynical, there may be a valid reason that the cash is yet to hit your commercial account.

Managing money is a tough regardless of the size of your business. It is tougher still for those at the lower end of the commercial spectrum, where the chances are the same person who is doing the day job is also doing the administrative work.

The good news is that there are plenty of tools online to help business owners get to grips with admin, many of which are free. Pandle, for instance, can automate the process of chasing and reminding customers for you, something that will have an immediate impact on reducing the number of debtors you have.

There is plenty that business owners can be doing to make sure they get paid on time. By following my advice and making a few changes you can boost your productivity, get paid on time, and ensure you remain on friendly terms with your bank.

 Be clear about your payment policy 

Regardless of the size of your business or the size of your clients creating a clear payments policy will put you on the right path to getting paid on time.

If you are in the contracting trade, for instance, you may want to include a link to a standard note on your estimates on your website, whereas if you are an IT contractor it may be preferable to issue terms and conditions tailored to the clients’ needs.

If you send a letter of appointment or contract, make sure your payments policy, whatever shape it takes, is mentioned on this.  If you ask customers to sign the document, it is an enforceable contract that you can later rely upon should matters take a turn for the worse.

As well as having the customer name and address right, your invoice should include your business details with the correct VAT registration number, any purchase order number and bank details. Also, be clear about who you are sending it to, so you know where to chase.

Essentially, the policy should include details of any penalties for late payers or, to entice early payment, offer discounts to customers who pay on time. 

Let software take the strain 

Getting organised with your payments and keeping track of who owes you what and when can be a stressful task, especially if you have had a long day working.

If doing the books and checking payments and expenses are being handled properly takes too much time, then it is worthwhile looking online for cloud-based applications and bookkeeping tools that can do the job for you.

Many of them are free and do lots of things automatically, such as send reminders to late payers. Pandle, for example, also gives real time cash reporting and forecasting so that you can easily spot current or future cash flow problems and react.

Simply by sending payment reminders to customers you will see an improvement in payment terms.

Debtor Days

It may come as no surprise that the longer a customer waits to pay the less likely it is that they will.  It is not uncommon to wait 60 or even 90 days for payment from larger businesses – or 120-days in the case of Carillion.  If there is an error on the invoice it will be longer.

It may be tempting to take on larger contracts as they can be profitable, but make sure you work out the impact on your cashflow before agreeing to work.  Most businesses that go insolvent are profitable, they just don’t have the money in the bank to pay the bills.  Beware of falling into this trap.  If the payment terms are bad and put you under pressure, think about whether it is worth the risk.

You may want to consider your payment terms. If like most small businesses you are quoting 28 days as standard, you may want to consider reducing it to 14 or fewer. Also, some businesses are willing to pay in advance if you offer a discount, so think about these sorts of options and negotiate them at the start.

Get more money up front

It is worth considering whether to ask a client for a deposit on the payment should the work be cancelled so you are not left out of pocket. If you have set a week aside for a projectthat  falls through or gets postponed, you are left with nothing to show for it.

Consider whether it is worth asking for as much as 50% to make sure the work goes through?

Likewise, you may want to discuss phased payments with clients, particularly if you are working on a long-term project. Making sure you get paid for your time as well as the end product can be difficult. If you keep a note of hours and bill in phases you are more likely to be remunerated for all the workyou have done.

What if you still haven’t been paid?

Of course, there are those who simply don’t pay on time, no matter how friendly and professional your reminder service is. Unfortunately, these are the tricky customers who need a tougher line. This is particularly difficult if you want to keep their business.

There are a few different options you can take. Firstly, if they want more work done then you can insist that they settle their debts first. You can also insist on a different payment system going forward.

Other options include selling your invoices and getting someone else to do the chasing for you known as invoice factoring (an important option if you need the cash, but you won’t get anything like what you’re owed), or pursuing a claim for payment legally, perhaps through the small claims court.

Taking control of your payments policy needn’t be a chore. By automating the system and handing it over to someone else you will find more time to focus on making your business a success, and ensure you get paid for the services you provide.