From XU Magazine, 
Issue 21

When did it become a late payment culture?

Taking a closer look at why late payments are such an issue for small business Paula Byers looks at the late payment culture, how it has become such an issue for small business and what can be done about it using a Xero App Stack…
This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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Having spent considerable time on the road with Xero for their UK & Ireland Roadshow tour earlier this year, we couldn’t fail to notice cashflow being their key theme.  Looking at their forthcoming program for Xerocon London, it looks set to continue as a hot topic, with many cashflow and payment Apps in their Marketplace as event sponsors.

We were also digital trainers for Enterprise Nation’s HeadsUp! program this summer, with cashflow being one of several topics we covered.  As it was oversubscribed, it was one of the sessions we were asked to run repeatedly, showing just what a concern it is for many businesses.

What’s cashflow got to do with it?

Johnny Cash once said, “Sometimes I am two people.  Jonny is the nice one.  Cash causes all the trouble.  They fight.”  Ok, so I’m pretty sure Mr Cash wasn’t referring to cashflow, but he could have been.

Cashflow can seem like a fight in business if you are that are constantly chasing invoices overdue.  Raising more invoices doesn’t help if you are not getting paid on time, as poor cashflow can cripple a business.

You’ve probably heard the phrase ‘turnover is vanity, profit is sanity, but cash is king’.  Businesses of any size or from any sector can, and have, fallen prey to this issue over many periods of recession.  During difficult times of trading, those with ample cash reserves weather the storm better than those with poor cash management.  Company turnover figures are great to flaunt, but don’t mean much if your cashflow isn’t, well… flowing.  Profit can bring peace of mind, but doesn’t indicate a sound business, without a stable reliable cashflow as part of the recipe for success.

So how big is the late payment problem?

The scale of the problem can be seen in figure 1 with data taken from Xero’s Small Business Insights for the year to July 20191.  Astoundingly, only around 50% of businesses are cashflow positive, with the average days to pay invoices average just below 40 days.  Significantly, as cashflow positive businesses dip further over the Christmas/New Year period, so the average days to pay rises to 42.

According to direct debit payment provider, GoCardless, late payments cost business globally £500bn per year in cash management and 80% of that is borne by small businesses.  

With 52% of B2B payments still made by manual Bank Transfer and UK Businesses spending 10% of their working day chasing payments, this represents a significant cost to small business.

The government see the priority, appointing a Small Business Commissioner2 in December 2017 to ensure fair payment practices, support resolving payment disputes and facilitate culture change.  They state late payment culture change ensuring small businesses were paid on time could boost the economy by an estimated £2.5bn annually.  However, nearly 2 years on and it is clear it still isn’t working, so more needs to be done.

Top tips for staying cashflow positive

The key is to ensure you lay the groundwork.  Here are our top tips to help iron out cashflow issues, or better still to head them off before they become an issue:

  • Manage Client expectations – ensure you have terms and conditions that are clear and fair and issued to new Clients at the outset of your relationship.
  • Communicate with your Clients early – so you can identify late payment issues early on and don’t be afraid to have the awkward conversations to resolve issues promptly.
  • Don’t fear a negotiation – if you have existing relationships, or new ones, where the payment terms are unfathomably long (you know the ones that impose 90 day payment terms for trading with them), just ask the question – you may get those terms down to something more manageable for your business.  We had a Client who did just that, with one of their key suppliers, negotiating down from 90 days to just 21 day settlement terms instead, still not their ideal, but the opportunity was important enough to them to accept it.
  • Use tech to help you – with the right Xero AppStack in place (see below), you can automate a lot of the process to avoid late payment issues.  Do make sure you retain the human element to keep it personal, lest the machines producing standard letters become ignored.
  • Monitor your cashflow – be flexible; if you notice repeat offenders, adjust your processes accordingly.  Keep a regular eye on your overall cash position to make sure it stays king in your business and help to spot problems early.

Apps to keep the cash flowing

The good news is Apps can help, as long as they are connected to your Xero AppStack and working on real time data.  What you might need may vary from business to business, as it depends on a number of factors such as how and what you trade and your business style.  There are a plethora of Apps out there, so we’ve summarised a few App options which could help:

  • Payment solutions – your first line of defence; make it as easy as possible for customers or clients to pay you through card payments online or in person, with services such as Stripe, Square and iZettle.  Direct debit options through GoCardless can also be especially helpful in ongoing relationships
  • Invoice financing – Apps such as MarketInvoice advance money against invoices raised, which can help ease cashflow
  • Debtor chasing – again Xero has automation that can work, or consider Chaser for specialist invoice chasing
  • Reporting options – Xero’s own tools, alongside specialist reporting apps such as Futurli, Spotlight can help you to spot trends in your data, useful to help you prepare for known poor cashflow periods, such as winter months for seasonal businesses in the tourism sector
  • Cashflow forecasting – Apps such as Float can help to spot issues on the horizon to help you plan and Fluidly is intelligent cashflow management software, using AI (artificial intelligence) to predict the future of your cashflow

Breaking the cycle

After nearly 30 years in business, we’ve seen time and again how cashflow issues create a knock-on effect and indeed have experienced this ourselves.  There are many instances where slow payers impact negatively on cashflow in a business, who in turn are then slow paying their own suppliers.  Consequently it can be a vicious circle, but it doesn’t have to be.

Cash needs to flow in a successful business but the good news is there are Apps to assist.  Set up correctly, alongside terms and conditions and clear processes, will help ensure invoices get paid on time.

In short, let’s stop the late payment culture and create a prompt payment revolution!

Why leave it there?

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