Managing cash flow by reducing late payments
By Wendy Tate, Mar 1 2017 08:00AM
One of the challenges of running a business is managing the cash flow. While it is wonderful to see high sales figures it can prove stressful if payments for goods or services sold are made late, putting increased pressure on the business finances.
There are a number of ways to help manage this.
• Ensure your sales terms are shorter than the terms you have with suppliers so you are not paying for goods before you have received your customer payment.
• Put clear terms on your invoice otherwise your clients won't know when you expect them to pay so will often wait until you chase them.
• Always put your bank details on your invoice accepting payment by BACS will be convenient for your customers and can speed up payments. This also reduces trips to the bank with cheques, using valuable time and which often carry charges to deposit.
• Early payment discounts is another good way of encouraging your customer to be prompt with their payment. This has to be managed closely to ensure the customer is only taking the discount when they pay within the time frame agreed for the discounted price.
• use proper accounting software so you can easily manage your debtors, Xero for example has the facility to send out email reminders automatically when a payment is due oftentimes invoices are then paid from this gentle reminder negating the need to call.
• set up a payment service like GoCardless it's a low fee option to get people on Direct Debit making collecting payments easier.
If after all of this you are still paid late then the Late Payment Act 1998 suggests - The interest you can charge if another business is late paying for goods or a service is ‘statutory interest’ - this is 8% plus the Bank of England base rate for business to business transactions. You can’t claim statutory interest if there’s a different rate of interest in a contract.
If your business were owed £1,000 and the Bank of England base rate were 0.5%:
the annual statutory interest on this would be £85 (1,000 x 0.085 = £85)
divide £85 by 365 to get the daily interest: 23p a day (85 / 365 = 0.23)
after 50 days this would be £11.50 (50 x 0.23 = 11.50)
You can also charge a business a fixed sum for the cost of recovering a late commercial payment on top of claiming interest from it.
The amount you’re allowed to charge depends on the amount of debt.
Amount of debt What you can charge
Up to £999.99 £40
£1,000 to £9,999.99 £70
£10,000 or more £100
If you would like to discuss your cash flow or any others accounting issues please don’t hesitate to contact us.