The real cost of late payments and how to reduce them

Poor cashflow is the main cause of small business failure and late payments is one big part of it.

Some of the impacts a small business will face due to late payments are, as we mentioned, poor cashflow, finance costs, admin costs, debt collection costs, and although hard to measure but nevertheless important, the opportunity cost.

In Australia, the average trading term is a 30-day payment from invoice date. Which for some, it means an extra 7 to 30 days from when you do the job to when you issue the invoice. If we use the Australian average late payment days (55 days) we are talking that, on average, a business would be waiting for payment between 85 to 115 days. Therefore, it quickly adds a heavy financial burden on small business.

Here is an example of the impact a business would have if their payment dates drift by 5 days

Yearly revenue of $1m / 261 working days it means on average the business is generating $3,831 per day, if they must wait an extra 5 days due to late payments, it means they need to borrow $19,157 to cover that gap, at 12% interest (average overdraft interest), the business is taking a hit of $2,299 extra interest. And this is not considering the admin costs involved in chasing the debt and borrowing.

Here is a couple of ways to reduce those costs by automating and streamlining your process

Offer online payments

This one is about making things easy to get paid, offering payment gateways such as Paypal, Gocardless and Stripe will streamline your invoice payments. One easy click away to get paid.

Pre-agree on collection

Using apps such as Practice Ignition can help you streamline your process, by ensuring payment will be collected on time and as agreed. The customer agrees to a form of payment from acceptance of the quote and once the job is done collection is automated.

Automate debt management:

If all of the above fails, then you need to automate reminders and debt chasing, services like Debtor Daddy will help you follow up those late debtors with an automate process to send reminders, call and otherwise engage in debt collection.

Invoice Finance

If your trading terms are initially long and the above options are of little help, they you may need to consider invoice finance, depending on the provider it will allow you access to up to 80% of the invoice value for an immediate cashflow injection. There’s interest and fees involved so make sure you consider this when engaging in this sort of lending. Apps like Waddle can sync with your XERO file for ease of use.