How to help your small business get paid by clients on time

Many New Zealand small businesses, already dealing with inflation and rising operational costs, are also being hit with another punishing setback – customers being slow to pay up.

According to a 2022 survey by small business platform Xero, 45% of invoices issued by Kiwi small businesses were paid late, with 8% paid more than a month after they were due. 

This slow payment trend is estimated to cost the economy $456 million a year. It can also have devastating effects on a small business, causing chronic cash flow stress. 

How often are Kiwi businesses not paid on time? 

Through the survey findings, Xero noted that small businesses that received 60% to 80% of their payments late experienced 19% more cash flow crunches when compared with businesses that were usually paid on time.

Since the average small business struggles with negative cash flow for a third of the year, this can damage a business's flourishing or even survival.

The Government is so concerned about the late payments issue that it's introducing the Business Payment Practices Bill, which will establish a regime requiring large businesses to disclose how long they take to pay invoices.

So, how can you help ensure you're getting paid on time? 

“The Government is so concerned about the late payments issue that it's introducing the Business Payment Practices Bill”

How to increase your business's chances of getting paid on time 

• Ensure you talk to your customer's estimates upfront before you start to work on cost. This helps to set their expectations.
• Invoice your client as soon as the work is done — the value of the job will be fresh in their mind. 
• When the invoice due date is looming, send them a reminder by phone call or email.
• If your customer is running late, follow up as soon as possible. The longer you leave it, the easier it is for them to ignore your invoice.
• Many small businesses send out invoices with the notice "payment due upon receipt." This may seem polite, but it may be better to set a clear deadline on the invoice to create a sense of urgency. 
• Make sure your contracts have clear consequences for late payment, such as charging additional fees for late payments. For a really problematic client, you may need to make it clear that if payments are not received after a series of reminders, you will send the bill to collections.
  
  

Could you trial flexible payment plans and automated processes?

Remember that we're facing economic crunch times, and some of your customers may be suffering and struggling to pay their bills. 

Your business may benefit from setting up flexible payment plans with these customers. This could include splitting a single invoice into weekly or monthly instalment payments.

It's worth discussing the situation with your troubled customers, so you can come up with a solution that doesn't cause you or them more grief.

Sometimes late payments can also sometimes be the fault of the business.

It's surprising how many small businesses don't have a robust accounting system in place that keep accounts and invoices visible and easier to track. As a consequence, invoices can slip through the cracks. 

Overseas research shows that businesses that carry out their invoicing manually increase the risk of errors, which results in more than 60% of payments being made late. 

Talk to your accountant about developing an appropriate system – there are numerous software programs that can be installed to automate the system.

To sum up

Late payment can make the difference between a small business remaining open or the owner making tough decisions about the future. 

Follow these steps to become more proactive in making sure you and your business are paid for your hard work. 

Do you have the right cover? 

If you're currently reviewing your business practices, it might also be a good time to review your insurance cover. Speak with one of our brokers today. 

Important disclaimer - Steadfast NZ Limited, its related companies and associates

This article provides information rather than financial advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, and seek appropriate financial advice before you act on any information.