After being repeatedly hit by late payments and bad debt during the recession, many businesses were forced to become more familiar with tools such as supply chain financing. But as the economic climate brightens somewhat, all businesses must avoid complacency and use the lessons learnt over the last few years to ensure a smoother process in the future.
Here are seven points companies should think about adopting.
1 - Knowledge is power
Customers’ ability to pay is a two-fold exercise, led by credit managers. Businesses should conduct external credit assessments that look into clients’ financial statements and credit ratings; they should also conduct internal assessments that can provide information about payment behaviour, which can help asses clients’ payment patterns and identify any potential default risk.
Naturally, not all companies can install such systems. Nonetheless, all businesses can ask some simple questions to try and ascertain their clients’ liquidity. For example: how do they usually pay their suppliers? What payment terms do they use? Do they take discounts for early payments?
2 - Set the right expectations
To minimise mistakes, contracts should be kept simple: obligations and penalties for late payments must be clear. The terms and conditions should also reflect the invoicing schedule and payment terms.
Standard contracts should be calculated with profitability in mind. Invoice as regularly as possible, ideally more than monthly and in line with the contractual agreement. Remember: electronic payment methods are more effective than cheques. These points should be negotiated using a trade-off tool. If clients request long payment terms, adjust costs accordingly.
3 - The sooner you invoice, the sooner you get paid
Although this is a simple rule, many neglect it. Corporations with over-sophisticated order management systems tend to be prone to mistakes. It’s best for clients to fill out a form with all of their details on when signing a contract and for these details to be recorded in the system first of all. Then, add steps that require fast payment. For example, make the fastest recurring electronic payments method the principal payment option in the contract. If the business model allows it, offer discounts for early payment.
4 - Establish a timely payment culture
All too often, companies expect timely payments and are surprised when this does not happen. It’s always best to have a collections department that tracks receivables proactively. Contact customers before due dates to confirm they received the invoice and accept it. Customer service calls increase client satisfaction, prevent disputes and reduce default risk. When managing payments, do use the carrot and the stick method. It’s reasonable to expect customers to honour their contracts: if there is a bad debt case, don’t hesitate to take them to court. Nevertheless, rewarding prompt payers with discounts can be a great way to strengthen relationships.
5 - Measure, measure, measure
It’s critical to assess a client’s profitability. This will help determine the strategic direction the company should take. A key measure is the time it takes clients to pay. It is also important to know why payments might have been delayed. Measuring and analysing even the smallest dispute is a vital step in understanding and optimising end-to-end working capital processes.
6 - Cash is king
Borrowing money at a low interest rate is good but financing your own business is better. In periods when cash that comes in quickly brings significant value to funding business activities, remember that close client relationships can facilitate early payment. Companies should ask about the possibility of payment in advance in exchange for faster delivery. Encourage the adoption of electronic payments, and investigate supply chain financing options in the event of payment delays.
7 – Know your market
Put experts in place to analyse market trends and the regulatory environment. For example, the UK recently passed the Small Business and Enterprise Act, which requires larger businesses to publish information about their payment practices. In the US, President Obama is rolling out SupplierPay, a programmes that look to try and make corporations pay SMEs on reduced credit terms or offer financing alternatives.
In an age when the smallest rumours can move markets in microseconds, awareness of the risks of late payments to cash flow is more important than ever. For those that stay on top of cash, the rewards can - and will - come.
This article was written by Oana Jianu, manager at REL Consultancy
This contributed article has been written by a guest writer at the invitation of Procurement Leaders. Procurement Leaders received no payment directly connected with the publishing of this content.