Late payments can hamper cash flow. One of the most important aspects of running a business is having a steady flow of cash.
Recall that last week, we provided tips on how to implement internal control around receivables. This article is focused on those receivables that managed to slip through the internal control mechanism in place.
A business without cash flow is sure to fail. You might think it is not a big deal if a client doesn’t pay a small invoice amount, but you should think about the situation where the number of unpaid invoices is beginning to pile up. It would be disastrous for the business.
You wouldn’t be able to pay your suppliers. In severe cases, you wouldn’t be able to pay your staff, and even the utilities can be cut. It is indeed a worst-case scenario.
However, it can happen if you let too many unpaid invoices pile up. Getting payments on time is a must to keep your operations running smoothly. Only a few late payments can cause a setback for your business.
Wondering how to deal with late-paying clients? You’ll need to consider whether you should charge a late fee, how you can follow up on payments and how you can avoid such a situation from happening in the first place.
Charging a late fee
Chasing after long overdue payments can be both physically and mentally taxing. It can be considered a total time waste because you could have utilized that time to acquire a new client or provide your services to your existing clients. A late fee is often used to persuade customers to pay up. While doing this can yield results, there are times when doing this can be a bad idea. You’ll need to calculate the positives and the negatives before you decide on adding this charge.
When should you charge a late fee?
You should know that if you’re not being paid by a particular customer, then it is likely that the same customer is not paying the bills of other businesses as well. If you charge them a late fee, it might compel them to pay you first when they decide to pay up.
If you take strict measures, you might be able to recover the money fast and keep the cash flowing. It wouldn’t take any physical or emotional toll on you, and you can spend more time trying to make money. However, there are cases where charging a late fee might not be a good idea.
When is it a bad idea to charge a late fee?
While there are customers who are simply reluctant to pay, there are some customers who might refuse to pay for genuine reasons. For example, a customer may refuse to make payments if they’re not happy with the service you provided, and probably they were unwilling to make a scene and decided to hold off on making payments. In case your customer is unhappy because of the services rendered, you shouldn’t add a late fee because that would make them even angrier and, in the end, do more harm than good.
You should always make sure that all the work you have quoted before has been done and there’s nothing else left. After that, you can provide the invoice to the customer. If you’ve fulfilled your end of the deal, then it is likely that your customer won’t have any problem paying for it.
How should you follow up on overdue bills?
It doesn’t matter even if the invoice you’ve provided your customer is complete or even if you ensure that your customer has a clear understanding of the service rendered; sometimes, customers may not pay for several reasons.
It is crucial for you to get your payment on time because you need that regular flow of cash to keep your business running smoothly. However, you don’t want to lose the business of a customer who may return in the future or that of a regular client.
Below are a few guidelines using which you’ll be able to follow up on your overdue bills professionally and courteously:
- On day 15, you can send the debtor a friendly reminder that their bill is due. You can write them a letter or send an email.
- On day 30, If you don’t receive your money even after a month, you can send the debtor another written reminder or talk to them over the telephone.
- From day 32 to 45, you can constantly call them up or write to them about the money they owe you. You’ll need to be persistent even if they find you annoying. You can send them another copy of the bill that includes the late fee. You must let them know how many days it has been since the due date.
- On day 60, If it has been two months since the due date, you can give the debtor the final reminder. You need to be firm this time. You can take the help of a collection agency if you feel the need to do so. But it is best if the issue gets resolved soon and doesn’t reach this point.
You might not be able to recover your money if the person you’re trying to recover money from has left town or has sold off their assets. You also won’t be able to recover your money if the person is undergoing bankruptcy.
How can you avoid late payments in the future?
Chasing after late payments can be unpleasant and require a lot of time and money. You should ensure that it does not happen in the future. To prevent this from happening, you should talk to your customer at the start of the business relationship. You should state clearly when and how you want to be paid and develop an agreement in this regard.
You can choose to offer your client a discount if they make the payment early. Customers love discounts; however, you should only offer a discount that you’ll be able to afford; otherwise, you might have to face cash flow problems.
For customers who are new or who have come to you for a single project, you should request them to pay you in advance. If you don’t know the customer, you shouldn’t risk your business’s cash flow for them.
If you’re running a business, you’ll likely come across customers who are difficult to deal with, and you should have a clear understanding of how to deal with them. Having the correct attitude is critical in this regard. Times are tough, and you should do everything to get your money back. However, you should ensure that your actions do not make your customers go to your competitors.
Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney