According to a report released by ASBFEO (Australian Small Business and Family Enterprise Ombudsman) in March 2019, large businesses that offered payment terms of 20 days or less, rarely paid on time! Further, a survey conducted by ASBFEO in November 2018 found that over 40% of respondents had received late payments for their invoices. On a more extreme level, the survey showed that 28% of respondents received late payments for over 60% of their invoices in the last financial year. Construction, mining, retail, state government, manufacturing and large multi-sectoral businesses were at the top of the list, with late payments of more than 30 days.
Throughout the COVID-19 shutdown period, we have seen more SMEs struggling to receive payments within 30 days. This is partly due to the excuses large companies now have to delay payments. We are here to share some great tips to ensure you survive the cash flow hit during COVID-19 by improving your payment terms and policies.
14-day payment terms
Our business and our clients are mostly operating with 14-day payment terms. With regard to cash flow management, there is a big difference between 30-day and 14-day payment terms. 90% of our clients pay their staff on a fortnightly basis. Considering salaries are the biggest expense for any business, by the time you finish the 2nd payment run for the month, roughly 60% of your allocated cash for that month will be gone. By implementing a 14-day payment term, you can use payments received from customers to pay your staff within one pay cycle. Having a 30-day term means you have to find a fortnights worth of cash from somewhere else to fund your staff’s pay. Thus, if you are currently using a 30-day payment term, we strongly suggest moving to 14 days. Further, it is fair to assume your customers will respect the new payment terms, as you have to pay your staff on time.
Make sure you get your client to sign off and approve any work you have done as soon as possible. This permits your finance team to issue invoices immediately, allowing you to collect the payment within 14 days. In the case of many SMEs, we have seen tradesmen who attend multiple jobs in a single day get tired by the end of their shift, resulting in piles of work papers that are not ready for finance to process. These days, apps like XERO or Service8 are available for tradesmen to use whilst on jobs. They allow tradesmen to collect evidence both before and after their work and allow clients to sign off and approve the work. These apps then integrate this information with their financial software to produce invoices. Paperless is the best practice!
Digital Payment Gateways
XERO user reports from 2019 show that more than 50% of customers open their invoices using their mobile phones. Therefore, you need to ensure your invoices are integrated with a payment gateway like Paypal or Stripe to allow customers to pay you with a few clicks on their phone. Most SMEs are either unaware of these payment gateways or believe they cost too much. Our analysis concludes that when compared to any bank merchant facility for credit card payments, Stripe is either equivalent in cost or cheaper as there are no ongoing or setup costs. Further, if you factor in the time and legal costs involved in chasing customers for payments, a seamless payment experience is a worthy investment!
Direct Debit is becoming ever more prevalent in today's society. Applications like AfterPay are so successful because they provide millennium generation of what they want! These days, most of our customers prefer to use flexible payment arrangements as they are not good at saving cash. We are not recommending that you should implement this method as a high priority because you are not a bank nor are you being backed by rich Venture Capitalists. You should only use this option for clients who are really struggling. Debt collection agencies take a 10-20% cut of the payments you receive, and you do not want to go through a legal battle that will leave you with nothing. Further, Direct Debit could improve your customer engagement as they would appreciate the opportunity to save up and pay you when they are able. In this difficult COVID-19 environment, if you can find a mutually beneficial solution for your cash flow and your customers, I believe both will survive COVID-19 and thrive in the long term!
Due diligence when preparing your budget and financial plan. I had a bad experience a few years ago when one of our junior accountants prepared a budget for us to present to the Board. Unfortunately, one of the Board members pointed out a flaw in our formula during the board meeting. As a result of that terrible experience, we always have more than one spreadsheet expert to monitor budget and cash flow management plans. If you do not have enough resources within your finance team to cross-check, then outsourcing is your best option. Practising accountant certainly has a deeper knowledge and greater experience than your in-house accountant or CFO. Budgeting and planning are more important than ever at this point in time. As we have heard many times, a bad plan is better than no plan. Using modern software and live data updates is the key to seeing your plan succeed. It will also enable your business to be agile and adapt to any forthcoming challenges.
Understand your rights and obligations
Last but not least, you must understand your rights and obligations when filing for legal action. If you have a customer that is unsatisfied with your staff’s work, you must seriously consider providing them with a partial or full refund. Through a refund, you can attempt to retain the unhappy customer for another 10-20 years. In my 13 years of business experience, I have found that most Australian customers are honest and respectful. Therefore, if they say there is a problem with the work they received, you are better off to invest some time and resources to understand the problem and to try and fix it. Don’t resort to legal threats as your first option. We are in the 21st century where customers are in the middle of our business. We are all human beings and we all make mistakes. If our customers are giving us valuable feedback to improve, we should take it on board and make some changes.
COVID-19 is expected to last for at least the next 18 months. Therefore, it is time to seriously make changes and adapt to survive. Most importantly, if we stay together as a business community, we will survive together!