As your local Chartered Accountants we’re passionate about helping our Nelson and Marlborough based clients succeed in business.
We’ve noticed that for many self-employed people and SMEs, one of the biggest business challenges is getting paid.
Our friends at Xero did a bit of research on this, analysing more than 12 million invoices, to work out how long it takes people to pay up. It found that no matter what payment terms businesses put on their invoices, people were, on average, a fortnight late with their payments. The research concluded, that if you require payment within 30 days, you need to set your terms at 13 days or less.
Dun & Bradstreet’s latest Trade Payments Analysis showed it took the average Kiwi business 40.3 days to pay invoices in the September quarter.
Cashflow has become very tight. But it is a two-pronged situation. Your customers don’t pay you and therefore you are not able to pay your suppliers.
The arithmetic is very simple, if you sell a product which has a mark-up of 33.3%, consider the following sums:
|Selling Price (+ 1/3)||4.00|
If you are not paid the $4.00 for selling that particular article then you must sell three more at a gross profit of $1 per article to put yourself back in the position you were before you sold the first one.
The problem is particularly severe in industries with high volume and low margins.
Here are a few tips to help manage your debtors:
- Be careful about extending credit in the first place (remember the arithmetic above)
- Make sure your invoices give you the right to add interest on unpaid accounts. If they do not have this on them you cannot charge interest.
- Consider prompt payment discounts. This is usually more attractive than the threat of penalty for slow payment, which most people know are seldom acted on.
- Offer alternate payment options. Let credit card providers provide the credit facility instead of you.
- Be prepared to charge interest on overdue accounts; go through your unpaid accounts regularly and do not hesitate to ring, personally contact, or write to slow payers
- Consider registering a security interest on the PPSR.
- Make it clear to your customers that you expect payment do not be afraid or backward about being quite positive in requesting payment.
- Establish a set of structured and consistent reminders.