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Cash Flow Cancer: The UK's SME Late Payment Culture

In our last blog post Xero: What is it? What is the hype? We briefly covered the issue of unpaid invoices in the UK. Here are the alarming figures:

  • £55bn UK SMEs are owed on late payments (Sage Pay)
  • 158 million man hours spent by UK SMEs chasing unpaid invoices (BACS)

What are we all doing?!

This is one of the biggest issues affecting small and medium business in the UK and it is self-enduced!

There are solutions to this issue too. Fully automated, cheap and reliable solutions to the biggest problem facing our SME economy.

This post was fuelled by this email from the FSB in which, the FSB published its research into the scale of the UK's payment problem.
Feedback from FSB members:
  • 60% would support a full and independent inquiry into poor payment practices.
  • 39% on average are offered terms longer than 30 days for payment.
  • 43% have waited over 90 days beyond the agreed payment date before being paid.
Top 5 reported reasons for late payments:
  1. No excuse or justifications given
  2. Internal invoice process issues caused delay
  3. The customer extended the payment terms without your consent
  4. Invoice was lost or misplaced
  5. Invoice was never received

Are these numbers making you feel queasy?

Is it because you know that your business owes/is owed money? Probably, that is why it got our attention too.

BlueHub like many of the UKs small and medium businesses is owed money from outstanding invoices. Like many of our fellow UK SMEs we have seen this as "just a part of doing business". This attitude/culture is part of the sustained problem that we are facing. We all accept this as the status quo when in reality the problem has big implications and is easily improved/solved.

The core of the problem is that it is seen as common practice to pay late, evidenced by two facts; long payment terms as standard and the number one reason given for missed/late payments is… no reason is given at all.

Cash flow is King. Fact.

It is the most common saying in small and medium business and there are severe cash flow implications this late payment culture has on small and medium businesses. We have all heard stories of business that are thriving one month and the next they are dead. Usually the problem is too many expected payments were late and the bills were right on time.

Enough complaining. What are the possible solutions to the problem?

With issues of this nature there is always an outcry for government intervention, which lead the Department for Business Innovation & Skills and the Chartered Institute of Credit Management implementing the Prompt Payment Code.

As the PPC is just a set of agreed standards and not a law, the rules only apply to code signatories and are unlikely to have an major impact.

Only 21% of FSB members think PPC will help the problem

Technology has a way of being more disruptive (in a good way) and adaptable to change than policy, and is the likely answer to finding solutions or improvements to this issue.

Xero Payment Services

Xero is a great way for you to keep on top of your businesses finances, from quick and easy reconciliation to live invoice reports.

Linking your Xero authorised payment service to you Xero account, invoice become interactive payment portals with direct links to your payment service. Allowing your customers to pay instantly, reducing the rate your invoice is forgotten about.
Even if Xero is not your chosen accounting package, you can still make paying invoices quick and easy, by making PDF invoices with links to online payments services like GoCardless and eWay.

Improve payment terms

What you include in your payment terms and the language you use, has an incredible impact on how people respond to your invoice. Our friends at Xero have covered this topic and offer some great actionable advice.

Read Xero's - Top 7 Tips: Invoice Payment Terms

Use technology - Send automated reminders

Sending consistent, well worded and well timed reminders is one of the best ways to reduce your payment lag.
Automating this process reduces your work load and increase the speed your invoices are paid. There are great automated invoice reminder apps like InvoiceSherpa and as we covered in our last post; Chaser, which includes a nice "thanks for paying" message once payment is received. These tools are a great way for you to increase the speed that you are paid, by reminding you clients with automated custom emails.

Satago is automated invoice reminder Add-on for Xero and QuickBooks, with a few additional features that can really help you know debtors and increase cash flow.

On top of fully customisable automated invoice reminders, Satago integrates with Experian, which delivers up-to-date credit check information on your clients. An Experian account is not needed and there is no cost for the data which is normally £20 per report. The information pulled from Experian displays credit limits and average payment time. Not only does Satago gather this information, it compares against the information you hold on the client, such as;

  • Average time it takes to pay you vs average payment time (Experian)
  • Money owed to you vs their total credit amount (Experian)
Satago offers a deep insight into your clients financial state and your relationship with them. The automated reminders will help reduced the time taken to pay your invoices, and the credit date will help you select your clients and how best to approach payments with particular clients.

Conclusion

The issue of late payments in the UKs SME economy have drastic consequences and seems to be embedded in the culture of small and medium business. It seems unlikely that a broad change will take place in the near future due to the scale of the problem. That being said, there are actionable steps you can take in your business (covered in this post), which can improve your cash flow and reduce the time it takes your debtors to pay.

Since we took the step at BlueHub to improve our payment terms & process and implement Chaser on top of Xero in our business, we have seen a marked reduction in the time it takes our clients to pay our invoices. Another tool we have started to use is Float; a cash flow forecasting Xero Add-on that helps us keep on top of out goings and late invoice to help us improve our budgeting and cash flow.

Book a call now to find out how we can help your business get a handle on your cash flow
If your reading this and having serious cash flow problems as a result of late payment of invoices a quick solution to explore is invoice financing, speak to your bank manager or financial advisor about the best option for you.