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By Charles Pittaway, managing director at Sage Pay
Late payments, bad debt and unexpected expenses are just some reasons why small businesses run into cash flow problems, which can impact their sustainability and profitability.
A recent study by Sage – ‘Late Payments: The Domino Effect’ – found that 15% of invoices in South Africa are paid late, while more than 88% of payments due to Small & Medium Business’s are never made or are made so late that businesses are forced to write them off as bad debt.
When small businesses aren’t paid, they can’t pay salaries or their own suppliers and have to delay investments into the growth of their businesses.
One way small businesses can cushion themselves against the impact of late payments is to maximise their cash flow and cut costs.
Here are some ways to do that:
· Don’t put all your eggs in one basket
Try not to rely too heavily on a single customer or client for the bulk of your income, especially if they are notorious for paying late. Ensure you’re getting revenue from a number of different sources.
· Stay on top of admin
Sage’s Late Payments study found that small businesses spend an average of 15 days following-up on payments. Cloud-based accounting solutions automate a lot of this function by sending reminders on overdue accounts, ensuring invoices are rendered correctly and, therefore, not rejected, and reconcile with your bank account to give you complete visibility into your cash flow. Make sure that you’re sending invoices to the right person and that you have clearly-defined payment terms and conditions, including penalties for late payments.
· Offer a variety of payment options and discounts
Mobile payment solutions, like apps and card readers, allow customers to pay on the spot and improve the customer experience. Offer discounts to debtors who settle their accounts early and run credit checks on customers before offering payment terms.
· Get on good terms with financers
Establish a line of credit with your bank before you need it. This allows you to build up a credit record, negotiate lower interest rates and gives you immediate access to funding when you run into cash flow problems.
· Manage working capital
Have enough stock on hand to cover demand but not too much stock, which could tie up cash.
· Employ a dedicated resource
The Late Payments study found that 24% of small businesses do not have a dedicated resource for chasing payments, while 13% don’t have the time to do it themselves. Yet, having someone to focus on collecting money can drastically improve your cash flow.
Every small business should have some money in the bank to protect against late payments and slow months. Having cash in reserve will help you to fund your business’ growth, meet your own payment deadlines and avoid penalties.