Better payment terms, better cashflow, better business

Xero UK managing director Gary Turner presents eight top tips to help small businesses reduce the likelihood of outstanding invoices and maintain healthier cashflow

Payments owed to SMBs are delivered on average 14 days late, according to a study of 12 million invoices filed over Xero’s online accounting platform. In essence, this means that any business wishing to be paid in 30 days should make its payment terms 13 days or less.

Sounds strict? In the current climate that’s essential as, for many small businesses, prompt invoicing and clear payment terms could ultimately mean the difference between staying afloat or going under.

Indeed, the Federation of Small Businesses is in no doubt that too many good businesses fail due to cashflow problems. An average two-week payment delay is worth an estimated £127 billion annually to UK SMBs, while the FSB’s own analysis shows that two-thirds of smaller firms have had to write off invoices over the past 12 months, with one in five confirming losses of £5,000 or more.

Unfortunately, as many firms know all too well, simply getting invoices out at the end of the month will not guarantee payment. However, introducing a few simple measures to the payment process will reduce the amount of outstanding cash the business needs to chase. The following tips and real-life experiences from UK SMBs could help avoid cashflow becoming critically low:

Tip one: Discuss payment terms before you get started

Great news – you’ve got the work. However, that’s no guarantee the client will pay up when you want them to. To avoid difficulties or confusion further down the track, it’s important to agree a set fee or payment schedule upfront.

For many Brits, talking money is uncomfortable. However, put it off and you may end up in a situation where the customer expects to pay at the end of the project and you think you are being paid at the beginning or in stages. Depending on the industry or business model, this may mean having to shell out for materials and staff before any money from the customer is received – having a damaging effect on cash flow.

From the client’s point of view, it’s also worth bearing in mind that, rather than being off-putting, achieving clarity and agreement on payment terms can be a good thing as it will enable them to budget for the job and avoid any unwelcome surprises when your bill comes in.

Gary Turner

Tip two: Keep detailed records of inventory and time

In many industries, materials and time are the main factors in the overall cost of the work. As such, keeping track of them on a daily basis will invariably save a great deal of time when it comes to creating an interim or
final invoice.

Crucially, it will also help you avoid missing any chargeable expenses. If the project is going over budget, it’s also possible to flag this to the client in advance, rather than risk them getting an unwelcome surprise when you come to invoice.

Tip three: Make the invoice clear and easy to understand

If a client is unclear as to exactly what it is they are being billed for, they have every right to query it to ensure there are no errors. However, this can lead to significant delays to the payment being processed, as everyone involved will want to be satisfied that there has been a fair outcome.

Listing the details of the job in a way that makes sense to the client is a good way to avoid such queries and subsequent payment lags. Equally, personalising the invoice with a business logo helps inspire further confidence in the professionalism of the work and your business.

Tip four: Set appropriate payment terms

With late payments potentially a make-or-break issue for small businesses, if you need to receive payment within 30 days, our data shows that your payment term must be set at 13 days or less. Bearing in mind that, on average, debtors pay invoices two weeks after the due date underlines the fact that staying on top of cash flow is critical if the business is to continue trading effectively.

Tip five: Address the invoice to the person paying

If your work is for a business rather than an individual, it really does pay to know the person who controls the purse strings. Crucially, having this direct point of contact helps ensure the invoice won’t get lost in the wrong person’s inbox. If you’re not sure who the bill payer is, give the client a call to confirm.

Meanwhile, from a relationship-building point of view, it can be worth sending an additional message to make sure clients are happy with the work. “We’ve linked Xero into our cloud-based CRM and customer satisfaction platforms,” says Richard Lane, partner at the sales performance firm Durham-Lane.

“Every time a client gets sent an invoice, they also receive an email that asks them how well they think we’re doing. This cloud-enabled automation not only saves time but also ensures that important customer feedback doesn’t get missed.”

Tip six: Invoice as soon as possible

It stands to reason that the sooner a client receives an invoice, the sooner they will make the payment. Equally, it also means the work delivered will still be fresh in their mind.

In this area, online accounting can really come into its own. Using a smartphone companion app, users can create, approve and send invoices from a mobile phone. This is often a huge time-saver, especially for
tradespeople and contractors, as it enables them to bill for a job as soon as it’s completed, regardless of whether they’re at home, in the office or on site.

Tip seven: Make it easy for customers to pay you

Online invoices make it much easier for clients to view and settle any outstanding balances, especially compared with paper invoices or PDF attachments sent over email. The invoice is securely presented to the recipient through a web browser which makes it simpler for the customer to access and pay directly using ‘Pay Now’ functions on the invoice screen. You’ll also get a read receipt updated back to your accounting software that tells you the invoice was received and viewed by the recipient.

Tip eight: Keep on track with debtors

Hopefully, following the above steps will mean far fewer outstanding invoices. Sadly however, late payment remains a fact of life for small businesses, with some customers giving less priority to smaller firms that have less clout and others who, unless chased, will ‘forget’ to pay at all.

To speed things up, as soon as the invoice is overdue, it’s well worth sending a reminder or monthly statement. Alternatively, if it’s faster and likely to get a more favourable response, pick up the phone. The more persistent you are, the more it will remind your client that you’re serious about getting paid.

As a business owner or director in a small company, it can also be helpful to take yourself out of the equation when the time comes to collect, as Donna Grant, a self-employed founder and creative director of hair and makeup business Beauty Angels discovered: “Working in the hair and beauty industry you develop a real rapport with clients: it’s a very personal service,” she explains.

“However, sometimes the payment side of things can feel awkward and it’s tempting to compromise on price. For this reason, having my PA managing the admin and reception side of things has been marvellous.

“Using Xero has allowed her to invoice clients directly for their appointments, which takes the issue of payment away from me. Clients can either pay upfront or afterwards, but because everything is tracked in Xero and followed up by my PA, I can be confident that the invoice won’t be missed.”