As our evolution to MarketFinance will tell you, we have a crystal-clear focus on helping business fund their growth plans in the most effective way. We know and understand the challenge that late payment, mounting debt and a drop in expected income can have for an ambitious business leader – and the results of our recent research show the sheer scale and impact of late payment practices in the UK.‍

The latest MarketFinance Business Insights research charts late payment trends between 2013 and 2019, analysing over 100,000 invoices. The analysis suggests that businesses typically agree 45-day payment terms from completion of work or delivery of goods. Despite this, almost two-fifths (39%) of invoices issued in 2019 (worth over £34b) were paid late – and this extended wait for payment can start to significantly affect your cash flow position.‍

The negative impact of late payment on cash flow‍

As any experienced business leader will know, cash flow is the lifeblood of your operation. Good financial governance comes from managing your cash flow well, and having the best possible access to additional finance when cash flow gaps do appear.

However, unexpected late payment of your customer invoices can begin to upset the smooth running of your finances, leaving a growing cash hole that slowly starts to eat your future funding, cash flow and profits.

Unless you can balance the money coming in (cash inflows) and the money going out (cash outflows) you won’t have the liquid cash required to run your operations, pay your staff and suppliers and keep your company trading. As such, it’s vital that you minimise any elements that are slowing down those cash inflows – and late payment can be one of the chief obstacles to overcome when aiming for a positive cash flow position.‍

Changing your payment mindset‍

Once an invoice has been raised against a customer’s account, there’s a prevailing mindset that this money is now ‘in the bank’. But your business will only truly benefit from this cash inflow once payment is received and there’s hard cash sitting in your bank account.

So, a change in outlook is critical. Rather than assuming that customers will pay on time, factor in the potential for these outstanding invoice payments to be late, and work this into your assumptions, planning and ongoing finance plan for your business.

With results from our research showing that the average business is owed £34,286 in late invoices, and that businesses are waiting on a total of £34b in late payments overall, it’s clear that a more focused approach to improving payment times is long overdue.‍

Getting in control of your late payment debt‍

Many businesses simply don’t keep their finger on the pulse when it comes to managing their financial position – working under the misapprehension that it’s the accountant’s job to ‘look after the numbers’.

According to our research, the majority of business owners (54%) are not checking their cash flow forecast on a regular basis, typically only reviewing them on a monthly or even quarterly basis. But if you’re not checking your aged debt, aged payables and cash flow position on a regular basis, you’re not truly in control of your business.

Rather than taking a passive position in the fight against late payment, what’s needed is a more active and preventative approach to managing late-payment debts.

To understand the scale of your late payment position:‍

• Check your main financial numbers – the Xero dashboard makes it easy to monitor and track income, expenditure and the overall amount that you’re owed in outstanding invoices. So, there’s no excuse for not checking these indicators on a regular basis and keeping yourself informed about the financial health of your business.‍

• Work closely with your accountant – frequent conversations with your accountant help to keep you aware of any late payment issues. Ask your accountant to provide regular, monthly management information, using your Xero data. These monthly reports can drill down into your finances, revealing how much you’re owed (your aged debt), who the bad payers are and what the current impact is on your overall cash flow position and working capital (the money you have available to trade with).

• Use your management information wisely – if you spot any aged debt or cash flow issues, work with your accountant to take action. And do this sooner rather than later. If several large invoices are unpaid, it’s likely that additional funding will be urgently required, or that legal action is needed to collect this missing cash.‍

Speeding up payment times‍

By taking a more proactive approach to your aged debt and cash flow, you put your business in a far better position to take pre-emptive action – and overcome the potential downsides of slow payment and mounting debt.

By removing any prevailing obstacles to smooth payment, you can speed up overall payment times. Key ways to do this can include:‍

• Using online invoicing in a productive way – by raising an invoice at the earliest possible opportunity, you bring forward the due date and reduce the time spent waiting for payment. Email your online invoice to your customer contact and to their accounts payable team – increasing the likelihood of the bill being settled on time.

• Choosing the most effective payment methods – if customers are paying by recurring monthly invoice, it makes sense to automate the cash collection. A solution like GoCardless uses the Direct Debit system to automatically collect payment from the customer’s bank account, as soon as the due date is reached. Offering other payment gateways, like PayPal or Stripe, and including payment buttons on your Xero invoice also make it easier for customers to pay.

• Automating your credit control – automated debtor tracking apps, like Chaser, can be integrated with Xero to constantly check for overdue payments. Emails are then automatically sent out to late-paying customers, chasing for payment and increasing the pressure on customers to settle this debt.

• Agreeing your payment terms early on – payment terms set out your expectations of payment times, whether that’s 45 days or 60 days from the invoice date. By formalising your agreed payment terms, and including these terms in all contracts and on all invoices, you tighten up the timings and have a legal document to refer to if customers fail to pay on time, or begin to back-pedal about when the money should be due.

• Charging for late payment – it’s common to charge any late-paying customers, adding an additional fee to the standard invoice amount for each day, week or month that the payment is overdue. By increasing the cost of late payment you create an incentive to pay on time – pushing customers to be more prompt and organised with their payments.‍

Access to finance when cash is needed‍

It’s clear that more must be done to cut down on the lengthening of agreed payment terms at the same time as tackling the ongoing issue of late payments. Long payment terms of 60 or 90 days may be the norm in many industries, but waiting for several months to get paid can be a serious challenge for many businesses.

The Government has introduced the Prompt Payment Code and Duty To Report legislation, with a view to bringing down payment times. But curing the issues of long payment terms and late payment of overdue invoices is not an issue that will be resolved overnight. It’s down to individual businesses to play their part and crack down on these payment issues.

Having a robust finance plan means having defined payment terms, excellent credit control facilities and being confident that you can access additional funding, if it’s urgently needed. Whether that’s making use of invoice finance, taking out a short-term business loan or looking into alternative funding routes, knowing that you have a defined route to finance is crucial for taking the worry out of late payment.

Certain, a creative agency, have used their MarketFinance invoice finance facility to overcome their own long payment issues. Typically, the agency was agreeing to 60-day payment terms with their clients, meaning it took two months for them to get paid. By making use of a facility like invoice finance, the agency can get an advance against their outstanding invoices and quickly get the cash needed to cover their costs and payroll expenses. That means less time spent worrying about cash flow and more time focused on the future success of their agency.

To beat the late payment blues, it’s important to:

1. Change your payment mindset and get proactive about late payment

2. Use management information to stay informed about your aged debt and cash position

3. Work closely with your accountant to create a strategic finance plan

4. Partner with finance providers to access funding when it’s required

The UK’s culture of late payment is unlikely to change overnight, but if business owners tackle the problem head on, with support from the Government and the main accounting bodies, it is possible for prompt payment to become the norm, and not the exception.