Make and collect payments using Bacs, Faster Payments, Direct Debit and Open Banking. Manage cash flow, invoices, remittances and protect your business from fraud.
One of the most well-loved lines in cinematic history is from the film Jerry Maguire. Picture the scene. Cuba Gooding Jr insists his agent, played by Tom Cruise, repeats the phrase “Show me the money” over and over, at the top of his voice.
We are not suggesting you need to do the same for your customers. But here we have some sound financial advice for businesses. After all, until you receive money from a sale then you are at risk of late or non-payment, making it tough for you to manage cash flow.
Evolving attitudes to making payments
How we shop and make a payment has dramatically changed in recent years. As a consumer, there are now so many ways we can pay for goods and services. Greater choice for the consumer is a double-edged sword - it can be hard for a business to know which method of collecting payments is best.
The growth of the subscription economy with Netflix style monthly payments is an indicator of how consumer attitudes to making regular, lower-value payments has changed. It is designed to keep customers engaged in long-term relationships and is built on experiences with a brand. Under this model, paying monthly via Direct Debit is convenient, simple and reliable – for both the consumer and the business owner.
However, in the business to business world, many companies, especially larger ones, see paying late as being absolutely normal. In fact, according to a recent survey 44% of large companies are consciously paying their suppliers late to protect their own cash flow.
This trend can hold back your growth and expansion, cause problems with paying your own suppliers and staff, and even threaten business survival when cash flow is tight.
Some companies are really bad at chasing outstanding invoices. Sometimes it is because business owners don’t like confrontation, or they are apprehensive about potentially damaging the customer relationship.
Monitoring your financial position
Understanding your financial position is an essential discipline and one that many business owners spend considerable time on. It is not surprising that cash visibility and forecasting is seen as the number one priority for small businesses.
If you have multiple bank accounts or trade-in different currencies it can be challenging to maintain clear visibility over your true financial position. The introduction of Open Banking and the ability to pull in statements and balances from different financial providers in once place, is an opportunity to gain much needed improved visibility.
Financial ratios such as profitability and cash flow are established methods of monitoring and assessing how your business is performing. Carry out regular monthly or quarterly reporting. This will allow you to track income and expenditure against budgeted forecasts. That way, you can keep an eye on your revenue, expenses and profits.
Clear financial projections
Good financial control is the cornerstone of a successful business. Managing every penny carefully and using your own funds wisely is essential to maximising your working capital and cash flow. Start with financial projections and look at different scenarios, e.g. how would you cope if you started running out of cash or your biggest customer went out of business without paying you?
Your business plan should include a sales forecast, expenses budget, cash flow statement, balance sheet, and a profit and loss statement. It can tell you how much investment you will need to make in order to achieve your sales and growth goals.
Financial projections and business plans are really important when you are talking to prospective investors or the bank. It shows a degree of experience and forward planning. Look ahead a maximum of three years in your plans as it is hard to predict further into the future.
There are numerous ways of collecting payments. Choosing which one is suitable for your business will depend on your particular circumstances:
Payment by invoice allows you to extend credit terms to your customers (e.g. 7/30/60 days). They are simple and convenient to implement but many businesses suffer with regular late payments and chasing them up can be time-consuming
Standing orders are automated payments where a customer has authorised fixed sums to be paid to you at regular intervals
Direct Debits are also automated but are organised by a business to debit a variable amount from a customer as payments become due as long as prior notice is given
Faster Payments are immediate payments (subject to bank’s fraud checks) and suited to urgent but low-value payments or supplier payments, payroll runs and staff expenses
Continuous payment authority from credit or debit cards, gives businesses the ability to debit money from a customer whenever a payment is owed (Note: they are not the same as Direct Debit and have attracted a fair amount of negative press in recent times)
Growth of Direct Debit collections
Some companies are really bad at chasing outstanding invoices. Sometimes it is because business owners don’t like confrontation, or they are apprehensive about potentially damaging the customer relationship. Or maybe they are too busy focusing on making sales and don’t have the resources for a credit management team to do this.
That’s why more and more businesses are turning onto the benefits of Direct Debits. For consumers, Direct Debit is the UK’s most popular method of making payments with the attraction of offering a money-back guarantee.
For businesses, the benefits include a more predictable and stable source of income, a lower risk of payment default and failure, and with efficient automated technology, it can be both low cost and require little resource to administer and maintain.
Become more efficient at managing cash flow
Busy business owners are often time-poor. That’s why you should seize any opportunity to run an efficient and lean operation. Automated technology can help you to achieve this goal.
By eliminating paperwork and manual effort, organisations can reduce the time required to complete many common tasks such as sending invoices, taking payments and reconciling the two. The earlier you can identify unpaid items or unreconciled payments, the quicker you can resolve them.
Managing your payments in an automated fashion can also have a positive impact on your cash flow and give you back time to focus on growing your business.
Don’t jeopardise customer relationships
Maintaining regular cash flow is critical. There is a degree of trust in providing credit terms to any customer. But there are many reasons why you might not be paid on time. The law is on your side if you want to charge interest on late commercial payments but many businesses are understandably not keen to jeopardise the customer relationship.
Deliver fabulous service to them. But whatever you do, don’t let them take you for a ride when it comes to paying up.
Sadly, there is a list of excuses as long as your arm for non-payment: The invoice missed the payment run. The cheque signatories are not in the office. The invoice never arrived. We entered the wrong payment details. The cheque is in the post, etc, etc.
Customers are the lifeblood of your organisation. Nurture them. Cherish them. Deliver fabulous service to them. But whatever you do, don’t let them take you for a ride when it comes to paying up. You might want to treat good customers differently perhaps by offering early payment discounts or other advantageous payment terms.
Preventing and dealing with late payment
Although it does cost money, consider carrying out credit checks before you take on a new customer and extend a line of credit. A poor credit score is a good indicator of future potential problems and could help you work out whether to avoid a particular customer.
Have a proactive plan for dealing with late payers. It is worth distinguishing between those customers with valid reasons for not paying, such as temporary financial issues. Maybe you can offer to spread payments out, so that you keep the customer and reduce the risk of not receiving full value from a sale.
Zero in on those customers that are habitual late payers. Start with regular email reminders that the invoice is due in 21/14/7 days etc. This can all be automated. Consider offering a ‘pay now’ option for immediate payment. It can be very compelling if a customer is telling you on the phone that they want to pay and you send them a link in real-time that they can click on to make a secure card payment.
Show me the money
Be firm, persistent and polite. If you find it personally difficult to chase money, ask your accountant or bookkeeper to contact late payers. If you don’t have someone you can call upon, simply create a new email address in a fictitious name such as Fred Bloggs, and tell people they are your credit controller. You can then separate yourself from the act of chasing for payment.
Read the guide to discover how the way organisations such as charities and small businesses use subscriptions is undergoing an evolution.
Ding! That’s the sound of an entrepreneur having a lightbulb moment with a great idea for a business. In a rush to develop a plan, launch to market and accelerate growth, make sure you give sufficient thought to how you are going to fund your brilliant business idea.
Once you have decided that collecting Direct Debits could make a big impact on improving your cash flow, you need to decide who to partner with. There are many different providers and offerings but how do you make sure that you pick the right one for you?
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