Large Australian companies and institutions are infamously bad at paying smaller businesses on time. The Australian Competition and Consumer Commission reports that nearly three quarters of all invoices are paid late. Considering many large businesses already have payment terms ranging from 61-90 days already, this can leave small businesses struggling to make ends meet.
There are some signs of change, with supermarkets Woolworths and Coles recently declaring a 14-day payment guarantee, but late payments are set to remain a fact of life for the foreseeable future. If they are not catered for, businesses can be driven to ignore their own debts, borrow from external services and even go bankrupt.
While outstanding payments are often out of businesses’ hands, their frequency can be reduced by addressing a few key areas. Rather than despairing, it makes sense for small business owners to adopt a more pragmatic approach.
Submitting invoices that are up to scratch
Poorly created invoices can quickly turn a three-month payment window into six. Large companies are renowned for delaying payments based on the smallest errors. If an invoice is rejected once, getting it back to the top of the pile can be a slog. If invoices are treated as an afterthought, this can lead to rushed documents, inaccuracies and frustrating conversations with buyers.
A specific run down of the required information from customers can go a long way to avoiding hold-ups. Inclusion of a company ABN number, contact details, GST calculations, description of the product, dates and of course the correct amount should be included as a minimum.
Digital tools that automatically generate invoices are one way to ensure nothing is missed. Not only do they create more accurate documents, but they also speed up the invoice drafting process, giving customers less room to drag their feet.
Online tools can also make invoices look more professional. Finance teams are more likely to take a well formatted invoice more seriously than one scribbled in biro.
On a wild invoice chase
No business owner wants to annoy its largest customers, but fear of chasing outstanding invoices can give debtors too much room to delay things. Businesses have a right to follow up on payments and being too polite can make things worse.
Frustrating as it can be, angry emails can damage relationships and hurt suppliers in the long term – especially where major customers are involved. When emotions are high, it’s particularly important to make sure communications are professional. A plan that involves emails, phone calls and letters that escalate based on a set pattern help staff to follow the best course of action.
Customer communications also need to be organised in a precise manner – a difficult task if outstanding payment info is scattered across various places. Online tools can help businesses track the exact status of invoices and send alerts when payments haven’t been made.
Know your customers
Tempting as it can be to rush into a sale, it is important to vet customers before services are delivered. A credit check is essential to make sure that the customer has the resources to make the payment, and a quick Google search can often reveal if a company is experiencing financial difficulties.
As time progresses, and customer relationships develop, it is important to understand whether the late payments are sustainable. If a client consistently misses payment deadlines, and staff are spending lots of time chasing, it could make financial sense to look for business elsewhere.
For frequent clients, it’s helpful to dedicate time to get to know the relevant contact for invoice processing, and ensure they understand the payment process. Finance teams are much more likely to prioritise invoices if a good relationship has already been established.
Mutual respect is also important. Larger buyers may have more financial might, but small businesses often have the niche product that makes their success possible. The more important a product to the seller, the more likely that payments will be prompt.
Right on the money
Many large companies need to get better at making payments, while small businesses need to plan to avoid sticky situations. By making sure invoicing processes are as slick as possible, suppliers can drastically reduce the frequency of their late payments. Unfortunately, late payments are a fact of life for most small businesses, but that doesn’t mean they can’t be tackled head on.
Sam Allert is the CEO of Reckon