Research by Xero last year found that getting paid is the number one financial challenge for half of South Africa’s small businesses, resulting in both increased stress and reduced productivity and that on average, these businesses spend 10.4 hours a month on debt recovery.
“Smaller businesses regularly rely on their payments to come in on time to be able to pay their overheads, which include their suppliers, salary, and rental payments. Late payments can therefore put these businesses under extreme pressure with regards to principal obligations such as keeping to suppliers’ credit agreements, paying staff on time, and upholding their rental agreement,” says Jeremy Lang, regional general manager at Business Partners Limited.
To limit the impact of late payments, Lang offers the following eight tips to SMEs:
1. Spread the risk
As big corporate businesses and government institutions are prone to being late payment culprits, it’s advisable to avoid being too heavily reliant on a few core customers of this nature, where possible.
Offering customers a discount on early settlement will incentivise them to pay as early as possible
2. Vet customers properly
When giving customers payment terms, it is important to establish both credibility and reliability. This can be determined by performing thorough due diligence on potential clients, checking credit records and obtaining references from previous business associates.
3. Manage debtors and offer discounts
Employ a dedicated, adequately trained member of staff to deal with the collection of money and to follow up on late payments. For customers that are frequently late, consider reducing their credit terms, even if just temporarily, until they find a way to pay more timeously. Offering customers a discount on early settlement will incentivise them to pay as early as possible, however, discounts should only be offered to the extent that a business’ margins allow.
4. Encourage cash sales
A healthy balance between cash and credit sales can be beneficial in challenging times as cash sales will guarantee a certain level of liquidity in the business.
Even the smallest error can result in lengthy processes and payment delays
5. Build up and maintain reserves
By having adequate cash flow reserves and facilities in place in case of a “rainy day”, a business will be able to stay afloat for a few months in the event of late payments.
6. Implement efficient admin systems
To avoid documents, such as invoices or contracts, being returned due to incorrect submissions, ensure the business’ administration procedures are efficient, thorough and free from errors. Even the smallest error can result in lengthy processes and payment delays.
7. Balance the working capital cycle
Businesses need to manage their working capital cycle effectively by ensuring they have adequate stock holding in place. This can be a balancing act, as too much stock will tie up cash, while too little may limit a business’ ability to sell.
8. Proactively manage relationships with financing partners
Establishing a good relationship and track record with a financing partner/bank manager is important as they essentially become a stakeholder in the business and, if continually updated and treated well, will advocate on the business’ behalf.