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The invisible cost of late payment on small businesses

Anyone running a small business will understand how late payments from customers can not only be a problem in the short term, but could also lead to closure of your business. That’s because late payments are not just delayed cash flow but involve numerous other visible and hidden costs. As delayed payments affect businesses, it impacts the economy too. For instance, the annual cost of late payments to small businesses is about £2.5 billion in the UK and A$7 billion in Australia.

Business failure

Companies usually focus on launching new products and acquiring new clients. But they fail to plan their invoicing structures and payment terms with customers. That is a guaranteed path to getting paid late. This results in poor cash flows, which is responsible for 70 to 90% of SME failure globally.

The major downside of no cash flow is obvious. Without money to spend, there is no way to keep your business running. And if you’re not getting your invoices paid on time, you also can’t pay your own bills —including payroll and rent.

The key thing about getting paid on time is to do proper research on the person or company you are doing business with. This will help minimise your risk of selling to somebody now or in the future who will not be able to pay you. And secondly, make sure that the terms of payment are firmly agreed upon in writing, and reinforced throughout the service process.

Interest Cost

As interest rates are at extremely low levels, small businesses are inclined to borrow money to bridge gaps between payments. Banks, often encouraged by governments, are keen to lend.

But they often ignore the cost of interest. After all, nothing comes for free, especially when it comes to loans, and interest payments can eat into your working capital. It can even affect your business’ credit rating if you miss payments that are due.

Opportunity Cost

This is an invisible cost, but it is a very real one. If you’re diverting time and resources to chasing invoices, you’re losing out on other productive activities.

Think about the money you could have earned from a new customer or a new product, which you are not doing because of sorting out late payments. That’s your opportunity cost.

Added Anxiety

Anxiety is a real-life cost to you and your business. Financial stress on the company or physical stress to you, especially by debtors owing you money, can stifle the creativity and energy you need to keep growing your business. Furthermore, a stressed-out business owner often means stressed-out employees too.

Unfortunately, your cash flow is in the hands of your customers. It’s up to them whether you get paid on time or not. The sense of powerlessness is horrible. But luckily, there are steps you can take to manage these relationships to facilitate punctual payments.

Want to know more about this topic? Listen to RIABU's Simon Littlewood and Mark Laudi discuss this issue on our podcast, Be First In Line To Get Paid:

Get more tips on effective cash flow management from our book, Let The Cash Flow. To find out more about how RIABU helps small businesses get paid on time, visit RIABU.com

Topics

  • Business enterprise, General

Categories

  • cfo
  • sme
  • balance sheet
  • riabu
  • business owners
  • prompt payment code
  • cash flow
  • late payments
  • xero
  • risk
  • smes
  • mark laudi
  • simon littlewood
  • invoice

Contacts

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