Having money come in and out of your business on a regular basis is a healthy cashflow. Your cashflow represents how well your business is performing and maintaining it ensures you have a good balance with your money. Now more than ever, SMEs are struggling with late payments with a typical small business spending 130 hours a year chasing invoices. The Close Brothers Barometer, published in March 2015 found that a record of 51% of small businesses cite cashflow, working capital and late payments as their main business concerns. Businesses automatically assume that not getting paid will affect their business because they have no money coming in, but the problem roots deeper than that. If you’re not paid on time, you can’t pay your bills on time. The cashflow cycle grounds to a halt and your business will begin to suffer. Here are three things paying your bills late could do to your business-
Damage your reputation with your existing suppliers
Companies are now becoming more cut-throat when it comes to who they deal with, and rightly so. With late payments becoming such an issue in business today, businesses are learning to cut ties with companies that don’t pay them sooner rather than later in the fear of becoming insolvent. Due diligence is bigger than ever before and your suppliers will be monitoring your payment behaviour. If you continue to pay your bills late, there is a higher chance that they would rather lose you as a customer than have you disrupt their cashflow and damage their business.
Get you into debt
If you are in really deep trouble with customers not paying you and you have a stack of bills to pay, you may think that taking out a loan to pay your bills is the best option. Yes this will help you stay on the good side of your suppliers and keep your business running, but taking out loans that you intend on paying back when your customers pay you isn’t a good idea. The reason you had to take out the loan was because customers’ wouldn’t pay you, so don’t get into further debt and depend on their money to get you out of it. Try to stay away from loans, and use any spare savings or money you have to keep your business running. It’s a good idea to always save when things are going well for when things might turn bad.
Damage your credit report and therefore discouraging new business opportunities
By paying your bills late your credit score will drop as a credit report takes into account payment behaviour when predicting your credit score. It will also drop if you are consistently paid late as there will be a dip in your money coming in. If you don’t pay your bills for a long period of time you could be issued a CCJ, and this will show up on your credit report, thus affecting your credit score. Companies who conduct proper due diligence before entering into business with another company will be discouraged from working with you due to your payment behaviour and your low credit score.
So how can we fix it?
- Make sure you’re paid on time. If you’re not paid on time the first aspect of maintaining a healthy cashflow isn’t working. Most businesses need money coming in for money to go out, so be ruthless with late payers. Make clear payment terms when starting your contracts so your customers know that you won’t tolerate late payments from the start. See our blog on ‘How to get paid on time’.
- Only deal with creditworthy customers. By doing your due diligence you could save yourself from bad debt before a customer gets the chance to not pay you. If you check their credit report you can see their payment behaviour, any CCJ information and their credit score and limit. Click here to see what else a credit report can show you.
- Monitor your existing customers. Monitoring is one of the most important things you should do. Change can happen at any time. Even if you have been dealing with well-established companies that you have never had any problem with payments from, if they start having trouble with their customers paying them there will be a knock on effect. Companies that seem too big to fail have fallen before, such as Comet, HMV and Woolworths. By putting all your customers on Creditsafe’s Risk Tracker, you will be alerted to any changes on their credit report by email and you will stay ahead of the game. Remember, if a company becomes insolvent there’s not a lot that can be done once it’s declared. Spot the warning signs; get out of contracts where companies are starting to slip on their payment methods.