Managing late payments and improving cash flow with Xero
It is essential for small businesses to get paid on time. Find out why it's so important to stay on top of late payments.
It feels great to get paid for a job well done; every invoice paid is another opportunity to do more of what you love.
Clients and customers who pay late can dampen the mood. It's not uncommon for businesses to be paid late; 87% of them do so, according to Chaser, a provider of accounts receivable management software.
Late payments can have a significant impact on the cash flow of small businesses with limited capital and smaller margins. Here's a guide to staying on top of late payments and reducing cash flow risks.
What do late payments mean for small businesses?
There are serious repercussions for small businesses when payments are late.
There are times when one invoice can make all the difference in being able to pay your suppliers and staff.
Your business could suffer from late payments in the following ways:
Inability to pay suppliers and staff
Limited purchasing power
Damaged supplier relationships
Limited operations until payment is made
Difficulty seeing your true financial picture
Reduced cash flow
Why is getting paid on time so crucial?
According to Chaser's late payments report, more than half of businesses spend four hours or more on payment follow-up tasks every week.
By getting paid on time, you have more cash to invest, and more time to focus on what matters. As a result, you can pay suppliers and staff on time, fund your operations, and increase profits.
To mitigate payment issues, you can do the following:
Reminders
By using Xero's invoicing feature, you can avoid late payments. Automated payment reminders can be sent to your customers before they are due. Your customers can be gently reminded to pay on time with these automated reminders that can be customized and sent at regular intervals. It can reduce the number of late payments and save you valuable time.
Late Payment Fees
You can also add late payment fees and interest charges to your invoices with Xero. You can discourage late payments by setting these fees and charges up in advance and drawing attention to them. In this way, you can cover the costs of any additional administrative work that you may have to do to chase late payments.
Automated Payment Tracking
You can track who has paid and who hasn't with Xero's payment tracking feature. When payments are received, your accounts are updated in real-time, so you can keep track of your cash flow. Your efforts to pursue overdue payments can also be prioritized based on which customers have a history of late payments.
Invoice Finance
You can also get paid upfront for your invoices with Xero's invoice financing feature. This feature allows you to sell your outstanding invoices to a lender who will pay you a percentage of the invoice value up front. In this way, you can avoid cash flow problems caused by late payments and ensure that you have the funds you need to run your business.
What is the impact of late payments on small businesses' cash flow?
Money moves in and out of your business in the form of cash flow. Negative cash flow, in which more money goes out than comes in, is caused by late payments.
Small businesses face this challenge with tighter margins and lower income than large corporations. Payment of a single invoice might jeopardise the rest of your month's operations.
Late payment protection for small businesses: what can they do?
It is up to the recipient of the bill or invoice to pay on time. However, there are some steps you can take to make it easier for them to pay on time.
The tone for timely payments can be set by strong relationships with your clients and suppliers. Your client or supplier will be more inclined to honor the payment if you have a strong relationship with them.
It is also a good idea to agree on payment terms before working with someone. Are you planning to use a 30-day invoice or a 60-day invoice? Do you plan to bill before or after the work is completed? Make sure everyone knows what's expected upfront.
When possible, embrace technology. Use software to automate invoice reminders. Chaser can help people get paid 54 days sooner if they follow up on their invoices.
Make footing the bill easier by adding digital payment options to your invoices. By adding a 'pay now' button to your invoices, customers can settle their bills in a few clicks.
Introduce late payment fees to discourage late payments. For more information on charging interest to late-paying customers, read this HMRC guidance.
Is it a good idea to delay payments to suppliers in order to improve cash flow?
It should only be used as a last resort. Paying late may damage your relationship with your suppliers, and businesses need reliable suppliers. Their cash flow problems will be the same as yours.
You should explain the situation and explain how you plan to correct the situation to suppliers if you must delay payments.
Managing late payments with clients and suppliers
It is essential to have good relationships with your clients and suppliers in order to deal with late payments. You can have a friendly conversation with your clients and suppliers if you know them well.
Beyond email and phone calls, you could also use SMS for automated follow-ups. According to a report by Chaser, businesses that use a combination of SMS invoice payment reminders and email payment reminders increase their chance of getting paid within a week of the invoice due date by 56%.
Software like Chaser and Xero can limit tricky conversations, through friendly and personable automation. Customisable automated invoice follow-ups can prevent your invoice from getting lost in the inbox. Online payment options let recipients pay the bill in just a few clicks.
How can bookkeepers support small businesses with cash flow?
As a business owner, invoicing on time is tricky when balancing multiple tasks. Your bookkeeper will prioritise timely invoices and follow-ups for you.
They'll keep your bank reconciliations up to date, so you always have a clear view of what’s coming in and going out. This is critical because it equips you with cash flow forecasting data to plan and make intelligent purchasing decisions.
With a proactive bookkeeper, you can avoid disruption caused by late payments and maintain a healthy cash flow. Combine their expertise with the right software, and you can be confident you’re taking every step to minimise late payments.
Users have seen results such as saving 15+ hours per week, and reducing days in business by over 75% with Chaser. Don’t miss out on faster payments and better cash flow for your small business. Try the Chaser integration today in Xero.
If you’re looking for expert advice with your business and utilising Xero, contact Zyla Accountants who will be able to help get the best out of it for your business operations and cashflow.