Audrey Giannini is a Virtual CFO with Summit CPA Group, a distributed accounting firm that takes a non-traditional approach. At Summit CPA Group, she helps business owners to make healthy financial decisions while sustaining a great company culture.
Audrey began her career working in audit at a Big 4 accounting firm, focusing on the Technology and Entertainment industries. After gaining audit experience with a number of Fortune 500 and pre-IPO clients, she moved on to a regional accounting firm to work in the tax department and focus on high net-worth individuals and closely held businesses and their owners.
Audrey joins us in this guest post to share strategies for managing late-paying clients, accelerating accounts receivable and maximizing cash flow.
Most small business owners share similar traits that make them exceptional at what they do. Passion. Vision. Contagious energy. Drive. Dedication. Yet all of those amazing qualities don’t matter if one crucial element isn’t on track: cash flow. For so many business owners, this necessary evil becomes a slippery slope. Having a solid foundation in place for how cash flows in and out of your business is a good place to start, but what happens when you have clients who consistently pay late?
Chronically late-paying clients are a burden on your cash flow and can put your business at risk. According to the Small Business Association (SBA), 30% of businesses fail in their first two years and 50% within five years. The second leading cause of failure for new businesses is that they run out of cash.
The key to the success of your business is to learn how to manage and maximize the cash flow in your business, and the timing of collecting payments from your clients can have a huge impact on your bottom line.
The following chart illustrates the difference between a 60-day accounts receivable cycle versus 45 days versus 15 days. This example shows that adjusting the payment expectation and strengthening the collection policy can increase cash from negative $30,000 at the 60-day mark to $50,000 in the bank with a 45-day cycle.
Tightening that even more with a 15-day cycle can increase cash by $280,000 in just four months. It’s important to note here that we didn’t increase prices or our revenue volume. The only thing that changed was the payment terms and tighter policy enforcement.
Many business owners dealing with clients who are consistently late to pay invoices struggle with what to do next. You appreciate the business. You probably have a relationship with the client. You may even know the circumstances that led to the issue on a regular basis.
That does not make it okay. What you do next matters for the future of your own business.
How to Deal with Late Paying Clients
1. Be clear and concise with your payment terms
Make sure your payment terms are clear. Payment due dates and late penalties need to be well-established. These should be communicated with new clients upfront. For existing clients who are paying late, reiterate your payment terms and penalties.
2. Connect with the right people from the start
Establish a relationship with the person paying the bills on the other end as soon as possible. Make sure you introduce the right people to each other early on to avoid emails or voicemails landing in the wrong place and going unattended to as a result.
Understand how and when your client processes invoices. For example, if they make payments once a month and you invoice on a specific day (which happens to fall the day after the day they cut checks every month), that will result in your payment being received way later than it needs to be. Work together with your clients throughout the process so you can receive your money faster.
3. Offer appealing incentives to pay early
Offer early pay discounts. Some enterprise clients and large clients are required to take discounts when offered. Reasonable options include offering a 1–2% discount for paying 10 to 15 days before the due date. Can you require ACH payments to ensure payments are made or received early? If you are able to control the payment method to one that works best for your cash flow, that’s even better.
4. Follow up immediately on late payments
Reach out to new clients 15 days before their first invoice date to check in and proactively work out any issues that may affect the receipt of the invoice. This is not a collection call and you don’t need to do this after the first cycle. It’s simply a courtesy and ensures you and the client are both on the same page.
After that, if your due date was clear and you have a client who misses the deadline, you need to then follow up with them immediately. Give them a call within a few days of the missed deadline to make sure they received the invoice. You can give them the benefit of the doubt at first; maybe the invoice got stuck in somebody’s inbox. But you don’t want to wait 45 days to find out that the invoice was never received in the first place.
5. Enforce your policy
When the expectations are clear and you’ve done your due diligence following up with the client, it’s time to enforce your late payment policy. One way to do that is by charging a penalty fee. If you do have a late payment fee, you might waive that for new clients one time as a courtesy but after that, it becomes a matter of training your client to pay you on time.
Another way is to halt work for the client. We’ve found that it’s usually more effective to stop work with the client than it is to collect a late payment fee. Again, it’s important to ensure the terms are clear and transparent.
Being firm about getting paid is your right as a business owner, but that doesn’t make it easy. It’s not unusual for entrepreneurs to let these things slide but stand tall. Remember why you’re in business in the first place. Channel that passion, vision, contagious energy, drive and dedication. Know your worth and do what it takes to make sure others do the same.