What is the hardest thing about running a small or medium business (SME)? If you are a business owner or manager in the UK, and extend payment terms to your customers, the chances are you are impacted by late payments. This is an area where accountants and bookkeepers can help by introducing smart credit control measures.
SMEs and late payments
According to the Federation of Small Businesses (FSB), there are just under six million small businesses in the UK. Whilst the overall figure may be fluctuating due to the coronavirus pandemic, it is crucial to understand just how important these businesses are to the economy.
Last year, SMEs employed nearly two-thirds of the UK workforce, with small businesses of up to 49 employees accounting for 48% of those.
Late payments are one of the biggest challenges for these businesses. One in five insolvencies can be traced back to invoices not paid on time or not at all. As an accountant or bookkeeper with SME clients, you can help prevent that.
On a day-to-day basis, business owners waste hours of valuable time chasing late payments to try and minimise the impact on their cash flow. As their accounting support, you are in the perfect position to support your clients, lighten their workload, and establish credit control best practices for the 21st century.
How accountants and bookkeepers can help
Accountants and bookkeepers have plenty of options to support their clients when it comes to improving cash flow and mitigating late payments.
- Keeping clients informed
- Credit checking new and existing customers
- Establishing credit limits
- Chasing clients effectively
- Writing a credit control policy
- Choosing technology
Keeping clients informed
Like most things in business, best practices for credit control change regularly. Staying on top of the latest regulations and recommendations can be just as time-consuming as chasing unpaid invoices, especially for those who are busy running and building a business.
Accountants and bookkeepers can make lighter work of managing the accounts receivable process. As experts in dealing with finances and payments, whether late or not, you are close to the latest information about this critical component of business management. Equipped with a more in-depth understanding of the laws governing credit control in the UK, you can easily keep clients updated on any changes - whether it is through regular meetings, monthly email newsletters, or blog posts.
Helping clients understand exactly when a payment changes from being due to overdue and whether the company can charge interest on the missing payment, is one example. Initiating and managing compensation claims is another.
Current law states that payments become late as soon as the timeline in the contract expires. This may be obvious to you, but do your clients know? Do they understand that if their contracts don’t specify a timeline, the law automatically assumes a 30-day payment period? Once that has expired, they are dealing with a late payment. At this point, charging interest and applying compensation fees to mitigate time spent chasing the payment becomes a possibility.
Credit Checking new and existing customers
Would a bank ever lend to a consumer or business without doing the requisite due diligence to ensure they are ‘good for their money’? Of course they wouldn’t. But smes, on a day to day basis, are granting lines of credit with their customers without any checks or meaningful process in place.
Credit checking within the sme space has grown substantially over the past few years, with providers like Chaser, offering SME credit checking services. These services not only provide credit scores, but also ‘days beyond terms’ that that sme typically pays on.
Having this type of insight up front can help smes make informed decisions on whether they should grant credit, if at all. It may be that due to a low credit score the business requests payment on delivery for the first few months until a working relationship has been established.
Credit checking shouldn’t be viewed as just a reactive tool, many businesses that monitor their customers credit scores use it as a proactive method to increase credit limits or extend terms if, for example, a credit score is good or improved.
Accountants and bookkeepers are well placed to advise their clients on the types of tool available in the marketplace to help their SME customers limit their risk and / or proactively grow revenue
Establishing credit limits
Banks and credit card companies limit the amount that businesses and individuals can owe them at any given time. Many businesses are missing out on this opportunity to limit their exposure.
As an accountant or bookkeeper, this is something you should suggest to any SME client. Setting limits is not only a critical part of an effective system of credit control but also vital to ensuring a healthy cash flow.
Plus, setting limits is not hard. All it takes is a frank conversation between supplier and client in which terms are explained. Of course, businesses can choose to deviate from their limits based on individual circumstances. Not establishing these limits in the first place is what will likely create problems.
Chasing customers effectively
Even with credit limits in place, SME owners will have to deal with unpaid invoices at some point. Getting advice on how best to chase can make the difference between securing payments sooner or struggling with cash flow issues in the long term.
Asking for money shouldn’t be awkward. After all, if you deliver products and services, you should get paid for those. To make a success of the process, it’s best to approach it strategically. This includes choosing a medium. Perhaps your clients prefer reaching out over the phone and having a personal conversation with their debtors. However, sending regular and personalised emails adds weight to the request and creates a ‘paper trail’ you can rely on later
In most cases, an email will be more appropriate, and it will often take more than one. Small business owners might find it hard to hit the right tone between reinforcing their claim and remaining polite. This is where accountants and bookkeepers can support their clients with email templates.
Templates cover basics that most SMEs can benefit from, and they are easily customised to individual clients’ circumstances.
Creating a credit control policy
Considering the challenging economic circumstances businesses are facing at the moment, it is only a question of time until many will have to deal with unpaid invoices.
For that reason, every SME should have a credit control policy in place. Developing this policy starts with putting safeguards in place and avoiding late payments as much as possible. Researching clients may raise red flags such as companies having gone into liquidation and now trading under a different name. Legal issues including disqualifications of directors should also cause concern.
Mitigating these risks is preferable to risking unpaid invoices. As an accountant, you may suggest your clients use pro forma invoices to secure (part of the) payment upfront. This is a worthwhile strategy with new clients or larger-than-normal projects. Asking for references is also useful.
Advise clients to be clear about payment and sales terms, including contact details for their finance department. In addition, clients will benefit from making their sales and project terms very clear right from the start. This includes payment terms.
Adding instructions about what happens in case of late payments is the next step. Sharing these with customers makes it clear that the business is serious about its finances and avoids surprises when problems arise. Ask customers to sign these terms.
Internally, a credit control policy can work like a standard operating procedure for a business. If a payment is late, the policy specifies clear proceedings and helps minimise confusion and delays. Getting SMEs customers to sign a credit agreement letter upfront, for example, is one best practice that not only ensures both parties are fully aware of the rules of engagement, but can be called upon later if any disputes arise.
Choosing technology
Over the past few years, accounting and bookkeeping has moved online and become partially automated. Supporting clients almost inevitably means introducing them to cloud technology for streamlining their finances if they are not already taking advantage.
Initially, clients may have concerns over the time it takes to set up and the investment required, but leading cashflow cloud applications pay for themselves within weeks, if not days. The likes of Soldo, Fathom, and Chaser were developed with the input of accounting professionals. They address the pain points of both small and medium business owners and bookkeepers and accountants alike.
Here is an example of how Chaser can help your clients: when a business raises an invoice, the software will automatically schedule a follow-up (which normally would take an smes time and energy.) Much of the follow-up is designed to prevent late payments and instead establish an even better client relationship.
Even before an invoice becomes due the software will send a payment reminder. Not all invoices become past due because the client has trouble paying. In many cases, it is as simple as the invoice being forgotten, or being at the bottom of the pile of payables. As soon as a payment is made, the client receives a thank you message.
On the other hand, if the payment is delayed, cashflow cloud apps will send reminders. Business owners can determine when and how a client will be chased, and it is possible to remind clients of more than one outstanding invoice at the same time.
Convenience is only one argument for bookkeeping and accounting technology. For many business owners, cost savings are the bigger argument. Manual credit control is time-consuming, costly, and ineffective. Hiring a full-time credit controller is often impractical for a small business. In this case study, cloud-based support saved one company 90% of the time spent on credit control and improved cash flow radically.
The next step
Cloud-based cash flow apps are not here to replace bookkeepers and accountants. Personalised advice enables business owners to make future-proofed financial decisions. By moving tasks like payment reminders and invoice chasers to an application, organisations not only save time- their teams can spend their time focusing on what matters most – building and growing their business for the long term.
