Four Ways to Avoid the Business Killing Cashflow Crunch

Cashflow is the lifeblood of any business. If it gets disrupted you won’t have long before you grind to a halt. With no money you can’t covers businesses expenses, pay employees, or much else.

One of the biggest causes of this is late payments, with some research suggesting 88% of small businesses are affected by this despite the government bringing in a Prompt Payment Code. Here are four ways to ensure you don’t crash before you even get off the ground.

Get on top of your accounts

Prevention is your first step. At some point a client will be late in paying you and it’s sure to happen more than once. If you fail because of this then there is something wrong with your business. You should be able to survive with a few missed payments (all of them being missed is a different matter).

Don’t let a day go by that you don’t balance your books as best you can. Keep a close track of your actual income rather than your projected income, while making sure all outgoings are recorded meticulously. By doing so you can see when it’s time to rigorously chase up late payments.

And don’t get caught out with your tax either. With every penny you make, put aside the government’s cut straight away. You don’t want to submit your accounts and be faced with a tax bill you can’t cover. Think ahead and don’t get sloppy.

Use a proper contract

Signing a contract with a client won’t come as a surprise to you, but some fail to include the parts that will make chasing payments significantly easier. Along with payment amount and the type of work you should be doing there are parts related to when you are paid that are integral to a contract that protects your business.

For a start, make sure a payment date is included, this is usually 30 days after complete work is submitted but other arrangements can be made. Then reiterate what the law says about interest on late payments. You are allowed to claim this and making your client aware of this will hopefully make them less inclined to try and get away with paying late.

You can either choose the government’s statutory interest rate, which is eight percent plus the Bank of England base rate, or set your own rate of interest in the contract.

On top of claiming interest, you can also bill for the cost of recovering a late payment.

While this won’t necessarily avoid late payments, it will be useful when chasing outstanding invoices. Reminding the client that their debt is compounding incentivises quick payment.

Monitor your invoices

This will partly come under keeping on top of your accounts, but it’s slightly more specific. Rather than simply looking at the amount you expect to come in, make sure you know who is meant to pay and when. That involves knowing at least a week in advance that Smith & Son Co are to pay £300 next Wednesday or that Klyne and Sons still owes you £150 from last Friday.

The more in the loop and up-to-date you are, the quicker you can start chasing payments and getting what you’re owed. It’s far too easy when you’re busy to let things slip through the cracks and you can be sure that paying your invoice isn’t at the top of your client’s to-do list. Make sure you keep a separate file that’s dedicated to client payments.

Dealing with late paying clients

So when it finally comes to pushing a client for your money, you might find that after reminding them of contract terms, you’re still not getting anywhere. This is where things can get a bit difficult.

To be fair, some small businesses don’t even like to ask for money, so just starting to chase the late invoice is a positive step forward. Start with a soft touch – you don’t need to go straight in with the contract option. They could have genuinely forgotten or have a good reason, but also be prepared for them having “good” reasons for a very long time.

After a few months it’s time to start reminding them of the interest and fees they’re incurring as stated in your contract. This should give them the impetus to start paying. If you like you could even organise some kind of payment plan, but that can obviously just lead to the same problems.

Eventually, if things just don’t seem to be going anywhere, it’s time to consider legal action. This could scare the client into finding the money, or it may cause them to become even more stubborn. If they owe under £10,000 you can use the small claims court to pursue defaulted payment, although it’s worth checking if the fees and time involved are worth the amount you might be able to recover. You can represent yourself, but you may need a solicitor.

Weigh up the pros and cons of getting serious, while there’s always the chance your client will cave it could end up in a lengthy legal battle. Don’t let pride get in your way. A lost payment is a pain, but it’s not worth disrupting your business over.

Image credit: John

Four Ways to Avoid the Business Killing Cashflow Crunch