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Bone of contention: according to research, SME owners spend 10pc of their time chasing late payments

Small businesses face an ongoing threat from late payments. Chancellor Phillip Hammond announced in his Spring Statement plans to “tackle the scourge of late payments” by large corporations to their small suppliers. Promising a “brighter future”’ for the UK’s 5.6 million small businesses, he outlined a requirement for big companies to report on how they’re paying their suppliers.

According to the Federation of Small Businesses, around four in five businesses have been paid late, the impact of which is far-reaching.

Bacs, the bank money transfer service, has calculated that Britain’s small businesses spent £6.7 billion in 2018 just to collect money they were already owed. Furthermore, the same research revealed that over a quarter of small business owners who have experienced late payments have been forced to pay their own suppliers late, and 28pc say they’ve had to cut their own salaries in order to keep their business afloat. Indeed, cash flow issues arising from late payments mean that more than two million people in the UK may not have been paid in time.

Late payments result in the closure of more than 50,000 small businesses each year, says the FSB, costing the economy £2.5 billion. Rachel Reeves, chairman of the Business, Energy and Industrial Strategy (BEIS) Committee, said “many SMEs are placed in a stranglehold by larger companies deliberately paying late and ruthlessly taking advantage of their suppliers, causing these firms financial instability”.

Welcome as these regulations are, though, no time frame has yet been announced for their consultation and implementation. Until they’re finally enforced, there are steps that small businesses can take now to help reduce the risk of late payment.

Tracking payments is an essential part of managing a company’s cash flow. It’s not always straightforward, however, particularly for those small businesses for whom addressing issues such as customer enquiries, content marketing, and business development take priority. Indeed, according to a study by Xero, UK small business owners currently spend around 10pc of their day chasing payments.

The following suggestions, however, should help to ensure a small business stays on top of its cash flow:

How to get clients to pay invoices

Almost everything is digital today, and there’s no reason why a small business’s invoicing processes should be an exception. Indeed, it stands to reason that sending an invoice via email will allow for faster processing that if it were sent through the post.

In most cases, the accounting software a business uses will vary depending on that business’s size. A spreadsheet application such as Microsoft Excel, for example, might be enough for a company in its earliest stages, but dedicated invoicing software is likely to become necessary as the company grows. Many software vendors will offer a free solution, although it is worth noting that it might not feature advanced options such as drag-and-drop templates for different scenarios, or the automatic calculation of VAT and other taxes. Often, therefore, it may be worth paying a small one-off fee for a basic bundle, inclusive of more features.

Businesses that regularly perform a significant number of transactions may be required to sign up to a subscription plan, under which it may be possible to enjoy added value features such as customer support, currency converters, and the ability to create multiple invoices when required.

Of course, different small businesses will want different things from their accounting software package and will know what they’re prepared to pay. The fundamental needs remain the same, however.

Keep documents simple

It might sound obvious, but it’s important that a company’s invoices look professional. For one thing, including the necessary company and financial information will provide clarity to both parties in a transaction. Ensuring that no misunderstandings can take place will reduce the likelihood of any queries occurring once an invoice has been raised. Clear payment information can help when dealing with VAT, for example, while a detailed delivery note can serve as a clear form of communication should a dispute arise over any charges. Indeed, many firms will refuse to work with a company that is either unwilling or unable to provide sufficiently detailed documentation.

It’s important too that invoices and receipts are uncluttered and easy to read. A business should take time to check that these documents display clearly on a wide range of mobile devices in order to make the payment process as friction-less as possible.

Offer ways to pay

And don’t make assumptions as to a client’s payment method of choice. Many small businesses will still collect invoice payment by bank transfer or even cheque, but it’s worth considering that some customers may prefer to pay by credit or debit card. It’s sensible, therefore, to offer an alternative method of payment wherever practical. What’s more, by enabling customers to pay in one click on an e-invoice, it’s possible for a small business to instantly reconcile its accounts automatically, freeing up administrative time that could be better spent on more pressing tasks.

Large companies tend to pay late, causing serious harm to small businesses and the wider economy. Fortunately, the government has recognised the scale of the problem and, in the chancellor’s proposed plans, has demonstrated its intention to tackle late payments. But until these plans become reality, business owners must do whatever they can to help improve their own situation. Using clear and accurate documentation quickly and seamlessly delivered, across a range of channels, is one step that every small business can take now to help ensure its cashflow stays on track.

Antti-Jussi Suominen is chief executive of Finnish entrepreneur bank Holvi

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