The impact of late invoice payments on small businesses
What repercussions do late invoice payments have for businesses?
As a small or medium-sized business (SME), you’re more likely to keenly feel the impact of late invoice payments.
Cashflow is essential for all businesses, but according to data published by Sage in 2017, the amount of company invoices being paid late has been at an all-time high in recent years.
Sage found the UK is the worst offender in the world for late payments, with 18% of invoices paid late and approx. 9% of invoices become bad debt.
Larger companies are often less impacted by late payments of invoices, due to having bigger reserves of cash, larger customer bases, committed resources for credit management and teams and systems dedicated to ensuring their invoices are paid on time by customers and clients.
But what are the impacts of late invoice payments on smaller businesses, and what can you do to manage them?
This blog post from the experts at Rosemary Bookkeeping explores how late invoice payments affect SMEs and what you can do to tackle the domino effects they cause.
What do late invoice payments cost a small business?
For many SMEs, the primary impact of late payments is, of course, a financial one.
Analysis conducted by our partners at Xero revealed in the UK, around half of the invoices issued by small businesses were paid late, with 12% paid more than a month after they were due.
According to the Smart Data Foundry and FSB, though late payments in the UK have improved some since Sage’s initial report, the continuing epidemic of late payments costs SMEs a yearly average of £22,000 and leads to 50,000 business closures annually.
With overheads, wages and operational costs to pay without a large cash reserve to fall back on, SMEs can quickly become in financially turbulent waters from late payments through no fault of theirs and have to borrow money from banks and other institutions.
That’s without mentioning the stress they can cause and the time SMEs can spend chasing late payments that they could be using to focus on the running of their business.
How can you tackle late payments as an SME?
According to Steve Dinsmore, corporate finance manager at Armstrong Watson, there are a few things you can do to tackle late payments:
- Know your customers: With existing customers and before agreeing on credit terms and limits for new ones, complete credit checks to flag potential problems. You could also research credit insurance, which protects you against debts or late payments.
- Be clear about your payment terms: Agree on payment terms with customers and follow up clearly in contracts and terms and conditions. Always make sure your payment terms are on every invoice you issue and keep these consistent.
- Avoid cheques: Ensure there is no opportunity for payments to be rejected by asking customers to pay using cash, electronic transfer or direct debit.
- Invest in credit control: Invest in credit control skills, staff or outsource to specialists. Be consistently firm, but polite, resilient and organised.
- Make a courtesy call: If issuing a customer with an unusually large invoice, call them before payment is due to ensure it has been received and there are no queries or issues.
- Start chasing right away: Begin chasing payments the day after it is due.
- Claim interest: You have a statutory right to claim interest on late payments at 8% over the Bank of England base rate and compensation for debt recovery costs.
- Be Flexible: Offer flexible payment terms. This could mean regular instalments or splitting a bill into manageable portions.
- Consider invoice finance: This allows you to unlock money stuck in unpaid bills and will help you manage your cash flow despite late payments.
Latest government support on late invoice payments
It’s important to note that, as an SME, you don’t have to struggle alone. There are systems and solutions in place that can help you manage.
In September 2024, the UK government introduced new measures to support SMEs tackle late payments.
These include:
A new Fair Payment Code
This replaced the old Prompt Payment Code and means businesses will need to prove they have met good payment standards before being awarded official code status.
This is designed to push businesses to pay faster and more often and keep responsible businesses doing the right thing by their suppliers and small firms.
The code can be applied by SMEs in three tiers:
- Gold Award: For firms paying at least 95% of all invoices within 30 days
- Silver Award: For those paying at least 95% of all invoices within 60 days, including at least 95% of invoices to small businesses within 30 days
- Bronze Award: For those paying at least 95% of all invoices within 60 days
This code is therefore more aspirational than its predecessor, as it supports businesses who wish to improve payment practices and help them advance their tier ranking over time.
The awards last for two years, and every business will need to reapply for their Award at the end of each two years.
Duty to Report
This month, the government has also introduced new legislation to ensure proper guidance for reporting payment practices and performance.
Under the Reporting on Payment Practices and Performance (Amendment) Regulations 2024, new reporting requirements have been introduced for companies in the scope of the reporting requirement.
These new requirements will apply concerning each financial year of a company beginning on or after 1 January 2025.
In April 2017, new regulations mandated that large businesses disclose their payment terms and practices.
This means that companies and partnerships affected by these rules must report biannually on various metrics, including the average duration for settling supplier invoices.
With the updates that take effect in April 2024, these requirements will be applicable starting January 1, 2025.
For larger corporations, the details they must disclose have been broadened to encompass the total sum of overdue payments and the proportion of invoices that go unpaid within a specified timeframe due to a dispute.
How a bookkeeper can help
Managing your cash flow with a good strategy can help you minimise the effects you feel from late payments.
Alongside our bookkeeping support around software and outsourcing, your local Rosemary Bookkeeper can help you understand and strategise how you manage your cash flow so you can feel more in control of your business’ finances.
Our experts will liaise with you at your discretion to ensure you feel in control of your finances without worrying about doing the work yourself.
We can help you at every step, from creating statements to monitoring your inflows and outflows.
Whatever you need: we do the books, you do the business.
To see how we can help you, find your nearest Rosemary Bookkeeping business or call 0345 862 0072 today.
