Accountants’ top tips for addressing late payments

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Late payments are an increasing issue for many UK businesses and their accountants. Here’s how you can mitigate difficulties.

Late payments are an increasing issue for many UK businesses. Two separate pieces of research published during the summer found that a significant number of invoices raised by sole traders and small businesses were not paid on time.

Insurer Simply Business found that small businesses are owed £32.1 billion in late payments while analysis by cloud accounting software FreeAgent revealed that 43% of invoices sent over the past twelve months were paid late.

Late payments cause significant cash flow issues for small businesses, many of which don’t have the financial reserves to fall back on. Late payment of invoices can hinder business growth, delay investment and – from an emotional perspective – cause stress and anxiety for staff.

Some business owners are having to dip into personal savings or rely on bank loans.

Dealing with clients who consistently pay late is not a new problem, but during a time of economic uncertainty, unpaid invoices are exacerbating existing challenges.

Accountants can support their small business clients in navigating this area. Potential solutions may include:

  • Implementing stricter and clearer payment terms for new customers.
  • Sending regular payment reminders.
  • Imposing late payment penalties.
  • Improved and regular communication between small business and their customers.
  • Ditching clients who consistently pay late.

To this end, we spoke to accountants for their top tips on how small businesses can deal with the difficult issue of late payments.

Adopt a tough and robust approach to late payment and implement the Late Payment Act

Todd Davison, Chartered Accountant and MD, Purbeck Personal Guarantee Insurance

Cash flow problems due to late payments stymie growth and force some small firms into taking on finance just to keep their heads above water.

Without strong cash flow, it is difficult for small businesses to reinvest and grow so being tough and having a robust approach to late payment could push your invoices higher up the pile and save the time and stress of chasing in the future.

To deal with this, we’d advise:

  • State payment Terms and Conditions clearly, including how you will deal with overdue payments.
  • Tell customers early on, as part of good relationships, that legal action will be taken against non-payers.
  • Send an invoice by email to your contact and accounts payable at the same time – making doubly sure your invoice has been received.
  • Use the Late Payment Act. This allows any business paid late to claim interest for the period the debt was overdue, plus compensation, if contact terms allow it.
  • Use a Late Payment Demand to show the customer the costs they will face, in addition to the debt, if they don’t pay up.
  • A Letter Before Action (LBA) is the last resort before making a claim. It sends a strong message to late payers and gives them one last chance to settle their debt.
  • Consider using a Winding-Up demand for debts over £750.

Verdict: Adopt a tough and robust approach to late payment including implementing the Late Payment Act.

Use automated payment collection systems to collect payment directly

Tom Hamilton, Founding Director, Erdingsworth Business and Tax Advisors

We’re seeing an increase in the number of small businesses that aren’t receiving invoice payments on time due to the ongoing cost of living crisis. It’s quite likely that those people who owe our clients could also be small businesses that are waiting on payment too, which causes a domino effect into other businesses.

Cash flow is the biggest concern for our clients when they don’t receive their payments on time. As a result of poor cash flow, they surrender their ability to pay employees or other suppliers which then causes issues to other people, too. It also causes issues if clients are looking to apply for financed items or borrowing.

Our top tip to support clients dealing with late payment is to set clients up on automated payment collection systems such as GoCardless. It allows businesses to collect funds directly from customers’ bank accounts. And for late paying clients, small claims is very easy to do too.

Verdict: Use automated payment collection systems to collect funds directly from customers’ bank accounts.

He who shouts loudest gets paid first, so keep chasing

Jamie Skelding, Finance Director, Prime Accountants Group

Late payments are a common problem for our clients, particularly where their clients are larger organisations with more complex accounts payable systems.

Late payment causes havoc with cash flow planning: receipts not being in when expected has a knock-on effect of not being able to keep to commitments. Managing cash flow takes time away from normal business tasks, not to mention creating stress for the owner-managers.

Clear communication and accuracy is essential in dealing with and/or preventing late payments. Such as:

  • Agree costs ahead of invoicing.
  • Ensure invoice details such as order references are correct and addressed and sent to the right person.
  • Have good monitoring systems in place to chase late payments, so you know what is expected and when. Then you can follow up and react quickly when problems arise.
  • Be prepared – have copy invoices to hand, and software which allows a copy to be sent immediately. This is often just a stalling tactic when trying to chase debt.
  • Keep chasing – sadly he who shouts loudest generally gets paid first.
  • Add pressure – if you can use future deliveries as a pressure to get paid, then do so.

Verdict: Clear communication and accuracy is essential but ultimately, he who shouts loudest usually gets paid first, so keep chasing.

Would you like to contribute to future articles like this one? If so, please get in touch with Annie Makoff-Clark at [email protected]. Upcoming topics include: helping clients with growth plans, leveraging professional membership and whether technology is improving workload.

Annie Makoff is a freelance journalist and editor.

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