I have yet to find a business owner that puts as much planning into how they are going to get paid as they do on what service or goods they are going to sell. It might sound a little odd to worry about cash collection so early on, until you consider the sole purpose of a business is to generate profits, and that is as reliant on customers settling invoices as it is on them placing orders.

Credit control is seen as the poor relation to sales. It is the less attractive part of the transaction process, requires no shiny-suit or Hollywood smile. We all then complain that it does not work.

We are told poor cashflow is the biggest reason for business failure, yet we continue to focus on selling more, and building up more and more debtors, even though we have not quite fathomed out how to get them to pay.

Then along comes the nice man from the bank, peddling invoice-discounting that promises to give us immediate cash for our outstanding debt. Now we are hooked.

This seems straight forward but try explaining it to a five-year-old.

Tell them Mr Nice Man owes you pocket money but instead of asking for it, you asked the bank manager to give it to you instead. While they are trying to work out why, tell them that when Mr Nice Man decides to pay your pocket money, you have to share some of it with the bank - and by the way, if Mr Nice Man does not pay, the bank manager will ask you to leave your house.

The truth is, it is a ridiculous way to fund a business. If you could get your customers to pay on time, or even early, you can avoid taking on debt and, assuming you are profitable, have enough left over to invest in further growth.

Customers go bust before they pay

What many businesses fail to recognise is that for each day an invoice goes unpaid, the risks of it never getting paid rise exponentially. And that is not just because of bad will, it can be entirely out of your customers’ hands; just look at how many invoices never got paid, and never will, due to the pandemic.

I have spoken with economists, bankers, accountants and SMEs whose varying estimates put the number of SMEs that will disappear due to the pandemic somewhere between 10% and 70%. As the base rate of failure is around 11% per annum anyway, I suspect that the true number will be somewhere between the two.

Alarming though this is, we can take comfort that SME owners are a resilient bunch and for every failure, one will return. Unfortunately, many of them will be repaying the personal guarantees and charges the banks hold over them from the debt they took over their invoices.

The combined value of invoices that will now never be paid is in the billions (quite how many has yet to be calculated), and of that, statistically, 61% was overdue at the point of lockdown. That means the vast majority of the lost billions should have been sitting in their suppliers’ accounts. Debt free.

As more businesses return to trading, armies of credit controllers are back at their desks now being faced with the stark reality that the customers they are chasing no longer exist.

So, let us use this time to change the hit and miss credit control we knew and despised, and in our ‘new’ normal, let us adopt what is proven to work.

Fresh look at what works

Forget the advice that tends to be wheeled out most often, which is about good housekeeping; get the paperwork in order, make sure order numbers appear on the invoice, that it is sent to the correct department and that you check before the due date that you are about to appear on the payment run.

I am sure for a small number of businesses, this process works fine. But for most, it is irrelevant. You can tick all the right boxes, but you are still going to be paid late.

The answer is closer than you think, because if you are sending invoices out, you are also receiving them, and, unless you’re part of the 39% minority, you’re also paying late. So, ask yourself, why?

What is the benefit in paying on time?

Why would anyone pay on time? After all, business is business and few people pay invoices just because it is the decent thing to do, or for recognition, which is why you do not see tombstones with ‘here lies a prompt payer’.

Once you have learned this small but imperative lesson, you will realise the onus is on you to get your customers wanting to pay within terms, rather than taking it personally when they do not.

So, the question becomes not ‘how to get customers paying’, but ‘how to get customers wanting to pay’. And you might be pleasantly surprised to find that it is also cheaper that way too.

First, you need to get your invoice on the ‘Pay Now’ pile. Irrespective of how poor your customer’s cashflow is, you can be sure they are prioritising some invoices for payment. These are the ones that keep the lights on, keep them out of prison or avoid hefty penalties. In short, these are the invoices which are in their interest to pay first.

So, to join this pile you will need an incentive, but do not worry - once you consider the costs of not getting paid quickly, you will find it is actually far less expensive to use the carrot over the stick. And your customers will even come to love you for it.

I have spent the past two years studying the costs and impact of poor cashflow, and even I have been astounded by my findings. It might horrify you to hear that, even by conservative calculations, waiting 90 days to get paid costs you somewhere between 3% and 10% of your invoice value. That is just the chasing, funding and risk.

When you consider the opportunity costs you had of sleeping better, getting more business, or frankly doing anything else, the costs are even higher. (Makes you wonder why so many businesses still refuse to accept credit card payments because the 1.5% to 2% fee chews into profits).

The natural option might be to introduce settlement discounts, but be warned, offering your customers a fixed percentage in return for a fixed term settlement often leads to a huge amount of administration, and most customers taking the discount and still paying late.

However, by incentivising customers with a dynamically reducing reward, managed by the vendor, but awarded retrospectively with our technology, we saw a swift change in attitudes by customers. Invoices to customers that had previously required several chase calls, copies, statements and polite emails, suddenly made it to the ‘Pay Now’ pile, resulting in a 40% improvement of payments made within terms.

While there has always been risk associated with giving credit, the pandemic may have highlighted the added risk of borrowing against debtors should they fail. Borrowing brings short-term relief from the symptom of poor cashflow, although businesses may now realise addressing the root cause of not getting paid is paramount.

With the range of tools and tech solutions now available to business through their accounting software, many businesses can now streamline their cash collection with the same efficiencies they have adopted for their sales pipeline.

If, by introducing more tech into running a business there is more time to focus on growing it, then perhaps we have the opportunity to look back at this period as a time when we improved business efficiency, invested more, and helped grow our economy.

About the author

David Landsberg is CEO of Peasy