Late payment is more than a headache: it could be the sign of a failing business

Any business owner knows that getting paid on time is essential to cash flow, but late payment isn’t just an inconvenience. It can be a sign that a firm is out of control of its finances, not making a profit, and even on the verge of failing altogether:

• Morethan a third of SMEs are regularly paid late, with British firms owed £14.2 billion last year, according to Bacs.

• Two out of three companies have cash reserves of just three months or less, research by The Wow Company has found.

• About 50,000 SMEs shut up shop every year due to late payment, findings from the Federation of Small Businesses show.

If you’re not getting paid on time, and cash flow is sluggish, there’s a greater probability that money will run out, and serious trouble may not be far behind.

So what can small business owners do to protect their businesses from this common problem?

Know your numbers

Many small companies don’t know if they’re in profit. Almost half of Britain’s smallest firms, those with fewer than ten employees, don’t know what their break-even point is – the stage at which the price of a company’s products or services is equal to the cost of producing them. It is past this point that an enterprise begins to make a profit.

Being busy and making money aren’t always the same thing and if a company isn’t in profit and has no cash reserves, it is vulnerable should a crisis hit.

Instinct and optimism will take you so far, but the route to objectivity about your business is always the numbers. Tracking orders, takings, margins, and costs so that you can spot quickly if you’re losing money means you can act early to stop the rot before a situation becomes critical.

Monitoring these figures, then calculating net profit, on a weekly or monthly basis will give a realistic idea of how the firm is faring.

Realising you’re in trouble when you see the completed company accounts four months after year-end is likely to be too late.

Regularly running the business’ numbers will mean you know what financial cushion you have should funds suddenly be needed to avert a disaster – or, more positively, to take advantage of an opportunity.

Build resilience, reduce risk

So, we’ve established that unpaid bills damage cash flow, and can make a business unnecessarily vulnerable.

Now it’s time to ask yourself where the points of weakness are in your operation. Are you being paid quickly enough by debtors? Are you using the best accounting systems to issue and chase invoices promptly? Have you got the best processes in place overall to ensure swift payment of money owed?

Anything that speeds up the receipts of customer payments for SMEs is a good thing, whether that’s introducing a decent accounting software package, or encouraging customers to pay invoices automatically by Direct Debit.

Using the latest technology available and efficient payment practices will mean that accounting is more under control, and aged debtor analysis – how much customers owe a company analysed by the length of time the debt is outstanding – is easier to keep up-to-date.

Any business that wants to improve its resilience and reduce its exposure to risk will seek to reduce debtor days. Ideally, it should not have to wait for payment at all.

Faster payments, safer business

The good news is that more smaller companies are getting paid on time. The most recent Bacs research shows that while many SMEs are still regularly chasing payments, the total amount UK businesses are owed has halved in the last five years.

Technology has a part to play in this, as more companies adopt slick, efficient digital systems to issue invoices and collect money.

But more business owners are also becoming aware that tried and tested payment processes such as Direct Debit are available to them now, without the significant cost and effort of going through the bank. Importantly, Direct Debit removes the headache of late payments from business owners’ lives.

But SMEs should remember that getting paid on time also makes the chances they’ll survive and thrive long into the future that much greater.