Is your money tied up?

Is your money tied up? Photo: Greg Newington

Picture this: a new client asks you to complete a job at short notice. You do the work, the client is happy, your invoice is sent, and a month later the bill remains unpaid. So you send a reminder email that goes unanswered, and follow up with a phone call that is not returned.

You don’t want to push the matter too hard and damage a new relationship. As a small venture, you don’t have a lot of power or resources to take on late-paying big companies.

But you have bills to pay and can’t afford a client to threaten your company’s cash flow, or its survival. Eventually, the bill is paid three months later, and after several stressful time-wasting follow-ups. Or not at all.

Sound familiar? Welcome to the world of many small ventures, where getting paid sometimes feels like a lottery, and where getting paid on time is a luxury. A world where honest, hard-working business owners can go bust because a client treats them like a bank for several months.

Yes, there are plenty of stories about how small ventures can improve their cashflow management through smarter debt-collection procedures. To be sure, many of them are hopeless at chasing up overdue invoices, and in turn allow themselves to be treated like an ATM.

A bigger problem is when emerging companies are brainwashed to pay bills as late as possible – well beyond agreed terms - to improve their working capital.

For small ventures, paying bills late and making life torture for suppliers by stretching out payment is usually dumb business. It has a marginal effect on cash flow and damages supplier relationships and the firm’s brand. 

I’d argue that firms that pay bills early – or even on time – create a huge competitive advantage through building stronger relationships with their suppliers. People want to work for the business and do a great job, because they appreciate early, reliable payment. They can spend more time on the work, rather than hassling clients to be paid.

It takes  52 days on average for businesses to be paid in, according to the latest trade payments data from credit-reporting agency Dun & Bradstreet. That’s down from a peak of 57.4 days during the GFC in 2009, but firms are still waiting more than three weeks longer than standard payment terms. Firms in New Zealand only wait an average 40 days to be paid.

D&B says 62 per cent of accounts in Australian are settled late and that about seven in 10 firms are concerned about their cash flow in coming months.

My guess is many small ventures wait considerably longer than 52 days to be paid. Their invoice terms – payment required within 14 or say 28 days – is little more than window dressing.

Rather than advise small companies how to be paid faster, the five tips below are for companies that take forever to pay their bills, or sometimes cannot pay them. Hopefully, the advice can help more late payers (some for reasons beyond their control) to better manage the process.

1. Be clear on payment terms: When commissioning work, ensure the supplier understands your payment terms and billing problems. Part of the problem is poor communication upfront: the supplier expects to be paid within 30 days, you only pay after 45 days, for example.

2. Ensure staff handle bills appropriately: Nothing frustrates suppliers more than staff in a big company sitting on a bill or refusing to forward it because it has low priority. If your staff commission and handle supplier invoices, ensure they know what is expected on receipt.

3. Be upfront: I had a late-paying client who refused to take my calls or answer emails about unpaid bills. It exacerbated the situation. Explain to suppliers if you are having trouble paying a bill and reasons why. Ask them to treat the information in confidence. That has to be better than letting suppliers think your firm is yet another that does not pay its bills and rips people off.

4. Be specific: Telling a supplier “I’ll pay you as soon as I can” is not good enough. Give a timetable, as best you can. Perhaps it involves part-payment of a bill over several months, as well as interest on the outstanding debt until repayment. Aim to pay as least some of the bill straight away if you can.

5. Do not confuse work and personal life: Never tell a supplier you cannot pay a bill because of a personal situation: an unexpected tax bill, personal financial problems, or a bad investment. It’s unprofessional and, in my experience, just inflames the situation. Blurring work and personal life only makes your firm look more inept in the eyes of suppliers who just want to get paid.

What’s your view?

  • Does your business struggle to get paid on time by clients?
  • How many of your clients often require at least one reminder before they pay?
  • What is your worst experience of being paid late (no names, please).
  • Is it getting harder to be paid on time?
  • Do the benefits of paying suppliers early outweigh the costs?