For SMEs, consumers may be king but cash flow wears the crown. Unfortunately, the Federation of Small Businesses (FSB) reports that 84% of small firms are still being paid late.

According to Bacs Payment Schemes (Bacs), the company behind Direct Debit and Bacs Direct Credit, the UK’s smaller businesses are facing an eye-watering total bill of £6.7bn in order to chase overdue payments.

Currently, over a third (34%) of business owners experiencing late payments are forced to rely on bank overdrafts.

This has knock-on consequences, with almost a quarter of SMEs being forced to pay their own suppliers late.

The good news is that despite the culture of late payments and its negative impact on growth and job creation, businesses that are prepared to confront the problem can and often do experience good results, such as improving their cash flow and prospects.

“Either by better controls or by using external support, a business has to master its processes over invoicing and credit control to survive and grow in an increasingly competitive marketplace,” says Christopher Briggs, associate director at Baldwins, one of the UK’s fastest growing accountancy firms.

Invoice discounting

“For many businesses, chasing clients for money can be a difficult process to manage,” says Briggs. “It can be time-consuming and unpleasant, which often results in ill-timed invoices and poor collection of cash. Even for SMEs that are very efficient at this process, increasing payment terms are now commonplace, which, if left unchecked, can fatally damage the business.

“Many businesses opt to raise finance using the debtor ledger, sometimes known as invoice discounting. Essentially, this means that a percentage of the invoice is paid straight to the company as soon as they raise the invoice. This allows companies to get on with what they do best while a professional organisation acts as their credit control. Importantly, it also allows the business to focus on growing; because cash flow is assured on any new orders won, the business can concentrate on winning and delivering the order rather than worrying about whether they can fund it.”

Outsource your credit control

Worcester-based creative agency F8 Creates has passed all its invoicing to an external company.

“We use an outsourced credit control company – we’ve found that they cost us less than the time it would take to chase invoices,” says F8 co-director Hamish Gill.

“It provides us with a different voice for chasing money, which we’ve found has had a positive impact on our relationships with our clients. They’re also able to provide us with a broad range of other services we wouldn’t normally have access to, such as credit checking,” he says.

Get a head start

When clients know exactly where they are and what they’re getting, the invoicing process should be quite clear-cut.

Clive Murphy, MD at Trojan Electronics a Swansea-based multi-channel e-commerce company, says communication errors are often to blame for glitches in invoice payment.

“Delays in payment are normally only caused by a problem with the supply of product or an issue with the supply of services. If there’s an issue or concern raised, this needs to be dealt with promptly and effectively,” says Murphy.

“Check that invoices have been received by the company you’ve sent them through to, provide statements and have regular contact to check that haven’t been missed,” he says.

Similarly, Rachel Hynes, head of administration and finance at design agency Waters Creative, is also keen to stress the importance of robust communication and points out that prevention is always better than cure.

“It’s worth getting to know the client’s finance system so that any ‘typical reasons’ for late payment have been eliminated before the invoice is sent,” she says. “Larger organisations are likely to have a strict process before processing invoices for payment so will be familiar with this.

“A reminder email sent the week before an invoice is due can help flush out any issues before an invoice becomes late.

“If that fails, it’s worth pursuing it immediately and systematically, keeping note of any promised payments so they can be followed up and resolved issues straight away. It can be time-consuming but ultimately worth it.

“Negotiating extended payment terms with suppliers will also go a long way to give breathing room if a client is late in paying. Staged payments with clients over a number of months has also proved very productive and really helps with cash flow.”

Cues from construction

The construction industry in particular has some challenging payment terms. David Kieft, spokesperson and president-elect for The Electrical Contractors’ Association (ECA) Wales, says project bank accounts (PBAs) have revolutionised the way in which the sector’s supply chain gets paid.

“PBAs help businesses maintain cash flow,” he says. “The vast majority of businesses within the construction industry are SMEs.

“It’s a recurring scenario for lower-tier contractors, including SMEs, to be waiting months for payment by firms up the supply chain. Throughout this time, the lower-tier contractor still has significant outgoings – such as wages – and is at risk of any insolvency higher up, which could ruin the business.

“Supply chain members that participate in PBAs no longer have to endure long payment periods; they receive the funds they’re due directly through a bank account, specific to the project they’re working on. PBAs therefore have the benefits of bringing payment certainty, and those payments are made promptly, allowing efficient cash flow.”

At a glance: six tips for smoother invoicing

1. Be proactive

Chasing invoices early via a polite call or email can often pre-empt a payment problem. Being proactive also helps you build relationships with your customer’s accounts department.

2. Be clear

Make sure clients know exactly where they stand and what they’re getting for their money.

3. Do your homework

Choose the right customers. If in doubt, obtain references or carry out a credit search.

4. Negotiate better terms

Payment terms can vary from 14 days to 30 days. A clear routine and structure in place can prevent confusion. Doing invoices in batches is a common tip – and sending invoices at the same time each month encourages consistency.

5. Set a date with suppliers

Creating Direct Debits will save your suppliers time and money, and could save you money in the long run, too. Direct Debits could help you negotiate better payment terms and avoid penalty charges on any overdue invoices or bills.

6. Play to your strengths

Financial experts advise setting up highly automated payments to take the strain, or outsourcing invoicing, leaving you free to focus on building your business.