Why don’t clients just pay on time!

If you send invoices, I can guarantee that some will be paid late. It is one of the few things you can guarantee in business. Sometimes it might just be a one off. Occassionally invoices can be lost or forgotten. However, it can become a bit more problematic when it happens on a regular basis.

Why it’s important

Cash flow is king. So many viable businesses have been crushed due to a lack of liquid cash at just the wrong moment. Invoices that are paid late make your business more vulnerable to that same horrible fate, as cash that should be in your bank account is actually in someone elses.

The two types of problem

First of all, it’s important to understand the two types of problem that can cause regular overdue invoices. If the problem is spread across all your clients, there is a good chance there is some issue with the way you send your invoices or collect payments.

A far more common issue is that you have one or more specific clients who, despite receiving your invoices, regularly pay them late. It are these late paying clients that I’m going to be looking at here.

Why do clients pay late

It’s infuriating when clients don’t pay their invoices on time. Appart from anything else, it is easy to feel like it’s disrespectful.

There are many reasons why people may pay invoices late.

Disorganised

In some cases it may simply be that the client isn’t that well organised, and is a bit haphasard at paying invoices. Understandibly, they may be focused on keeping their clients happy, inadvertantly at the expense of their suppliers.

Maintaining their own bank balance

Some client purposefully pay invoices as late as they can. The longer they can hold out, the higher their bank balance remains. Some businesses specifically wait until they have been sent a few reminders before paying out.

Cash flow management

Obviously, late payment of invoices can be a sign that they themselves are having cash flow problems that require management. Cash flow issues can fall into three categories:

• Temporary cash flow issues which will be resolved soon.
• Terminal cash flow issues that could result in the business going under.
• Long term cash flow issues that are probably due to the irratic nature of the business.

Some businesses simply have an irratic cash flow. I recently met someone who ran a family business where they only made one or two sales a year. When they made a sale, it was huge, but that money would need to last until the next sale, and no-one quite knew when that would be.

How to manage clients who pay late

If you have a client who regularly pays invoices late, the first thing you should do is talk to them about it. Try and find out why they struggling to pay their invoices on time. You may find there is something that you can do to improve the situation. Even bringing the fact you are concerned to their attention may be all that is required.

On a more general level, here are some of the things you can do to keep late payments to a minimum:

Add late payment fees

You could add late payment fees to invoices that go overdue. Essentially this acts as a penalty that the client can avoid by paying invoices on time. There are legal limitations regarding how much you can charge as a late payment fee, so make sure you stay within those limits.

Offer a discount for early payment

If you don’t like the idea of a late payment fee, you could try and early payment discount. This essentially works by offering clients money off their invoice if they pay it early.

Impliment payment reminders

One straight forward thing to do is impliment regular reminders when an invoice goes overdue. Most modern accounting software will even automate this process for you, meaning that once you set it up, you then don’t even need to think about it.

Offer automated payments

Another feature you often find in modern accountancy software is the ability to setup automatic payments much like a direct debit. Rather than the client having to pro-activly send you money, they can set up a payment method that will be automatically charged when an invoice becomes due.

Increase your rates for clients who pay late

Fundamentally, servicing a client who regularly doesn’t pay on time is more risky than a client that pays promptly. Depending on your business model, you may be able to increase how much you charge that client to account for that additional risk.

Put a hold on any outstanding or ongoing work

There may come a point where someone is so overdue that you can’t justify doing any more work until their account has been brought back up to date.

Late paying clients are not the end of the world

This topic can often generate quite agressive reactions from many in the small business commuity. It is common to read people advising a zero tollerance to clients who don’t pay their invoices on time. The excuses for regularly paying invoices late are usually very flimsy, and we are all in the same boat, with our own invoices to pay.

Asking for money is never easy, even more so when you are a flesgling business, or you have clients who are much bigger than you are. However, if you are not careful, you can easily find yourself letting some clients walk all over you.

That being said, if you can mitigate and manage the risk late paying clients pose, there is no reason you shouldn’t continiue to work with them. Fundamentally, just because they take longer to pay invoices, does not mean you can’t have a productive and valuable relationship. The important thing is that you account for the late payments when evaluating if this client is worth keeping.

I’ve worked with clients in the past where every part of the relationship was great, except the invoicing. Their accounts person was just a pain to deal with, and would constantly require chasing to get things paid. Sure it was extra hassle that I could do without, but it wasn’t enough to make me want to drop the client. It was still a valuable relationship, and I did get paid (eventually). I automated the followups as much as I could, and periodically I would have to manually chase them up, but that extra overhead was more than covered by the revenue from that client.

You have to look at the client as a whole. In some cases, the constant overdue invoices will be enough to push the relationship over the edge, in which case you must drop them. But in some cases, it might just be an annoying characteristic of an otherwise great client.