The Real Cost of Late Payment. Why it May Have Gone UP During Lockdown, and What You Can Do to Save Your Business.

4th June, 2020.

Late payment is annoying.

It causes huge problems for your business, your staff, for you and your family.

At Debt Doctors, we understand these problems could be terminal!

According to the latest Zurich SME Risk Index, over half of UK SMEs are owed money from late payments.

The estimated total amount owed could be as much as £255billion. (£44.5b in 2017).

Before Covid-19, it was already costing SMEs more than £2billion a year just to chase and enforce late payments.

That’s just tangible costs.

There are many intangible, serious costs for you to consider as well.

Post Covid-19, that £2billion is likely to increase significantly, along with the amount of business being written-off.

Late Payment or Bad Debt not a problem for You?

You may think none of this applies to you. 

Maybe you always have enough money in the bank account to pay the wages and the bills. 

Well, that may be true, but consider this…

If you do get late payments … even if you always manage to clear them up at some point, many of the costs described here will apply to you.

Why? Because in spending time chasing debtors, you will erode your profitability.

And post Covid-19, you may well find your late payment problems increase in numbers and severity. 

So, what are the real costs of late payments, both tangible and intangible?

Your Unpaid Invoices:

For a business with a GP of 20% and an unpaid invoice for £5000, the prima facie, tangible cost is £5,000. 

But that’s only the start of your problems: 

• You will need to generate a further £25,000 in sales just to recover the £5,000 you’ve lost, with no profit made on those sales.

• There will be a significant cost of generating the additional £25,000 – sales, marketing, admin, your time, telephone, stationery etc.

• You will also invest further time, telephone, stationery, admin, and emotional cost into chasing the late payment.

• You may, at some point, incur legal or debt recovery costs … or both.

Time Wasted Chasing Invoices:

Previous research by leading small business financier Liberis, showed that 72% of SMEs were spending up to 3 days every month chasing late payments.

That’s over 5 weeks every year!

And this time penalty will increase substantially, so please consider what you could do with that extra time and how you can get it back from your debtors.

And the biggest time penalty of all is this:

If you allow a debt to reach 90 days past due date, you will only have an 18% chance of getting your money.

A sobering thought!

Increased Borrowing = Increased Cost of Sale:

Staff, landlords, suppliers, and other support services won’t wait for their money simply because your customers haven’t paid you.

So, you may have to borrow money to pay everyone...

Before Covid-19, a quarter of businesses facing late payments had to rely on bank overdrafts to make essential payments. 

Or you may incur the cost of financing it yourself… 

Previously, 28% of company directors have reduced their own salaries to keep essential working capital in their businesses.

You may be identified with Late Payment:

A survey by BACS recently revealed a third (32%) of businesses suffering late payment said it forces them to pay their own suppliers late. 

This will indicate to your suppliers that your business is in difficulty and could well lead to less advantageous terms for your future orders.

In addition, paying your suppliers late will have a negative effect on your credit score, so it will be harder for you to secure alternative funding and alternative suppliers.

When you pay your suppliers late, you face huge risks.

Aside from statutory remedies for charging interest on late payment, some of your contracts may include extra administration charges for handling of:

• Late payments

• Bounced cheques

• Failed direct debit collection

Late Payments Put Your Mental Health at Risk:

Late payment can be seriously emotionally debilitating.

A survey by The Prompt Payment Directory found that a quarter (29%) of UK SME owners struggled with…

• Depression

• Anxiety

• Increased stress

…As well as other serious mental health issues, caused by the worry of late payments.

Over a third (34%) regularly lose sleep due to poor cash flow caused by late payment.

And 7% claim hair loss due to anxiety. 

But even more worrying is this…

Around 20% of SME owners said poor cash flow, caused by late payment, had put significant pressure on their marriage/relationship (12%) or caused it to fail (6%).

If this all sounds familiar, get in touch with Debt Doctors today. We’ll help you manage the crisis and give vital support to your financial management.

Without Debt Doctors, You could end up paying the ultimate price - Insolvency:

Yes. You could go bust.

1 in 4 (23%) of UK business insolvencies are attributed to late payment (2016 survey by insolvency trade body R3).

And in a further 20% of insolvencies, the failure of a customer or supplier business was the primary factor.

The BACS survey indicated around one in five (19%) of SMEs affected by late payment would be driven to insolvency if owed a debt of £20,000 to £50,000. 

Most worryingly, at the time of the survey 7% of businesses said they were already at that point!

Ask yourself this question:

What’s the biggest debt you have right now?

Or perhaps more to the point, what are you owed by your three largest customers right now, and can you afford to lose it?

Wherever you are at with things today, as we emerge from Covid-19 and into a new normal, one thing is certain…

Late payment is a significant threat to the survival of your business.

Take Steps Now to Avoid Financial Disaster:

Your most reliable indicator of when you’re going to get paid is (or should be), your invoice ‘Payment Due’ date.

Do you put the ‘Payment Due’ date on any invoices now?

Do you use a pre-invoice checklist?

If not, please email [email protected] and we’ll send a checklist template for you. 

If you don’t know when your payments are due, your customers won’t know either, and you will not be able to create a meaningful cash flow forecast.

It will be guesswork.

And with no cash flow forecast, how can you make plans for your business future?

Do you have any slow or late paying customers?

If you do, then you should have a contingency fund set aside to cover additional resources and costs needed to recover your money from them.

All of which will eat into your profits.

Reduced Investment Opportunities:

If your money is anywhere but in your bank account, you can’t use it.

There may be a host of things you may want to do with it…

• Pay a dividend

• Launch a marketing campaign

• Employ a new team member

• Buy some new equipment or machinery.

But you can’t do any of these things because…

Your customer has your money.

There are many business owners taking loans to grow their business.

They do this when the money they need is sitting in their aged-debtors ledger, waiting to be collected.

And we often hear them say…

“We don’t want to chase them for payment as we don’t want to upset them and lose their business”

If that’s what you say or think, here’s what it’s costing you…

• You’re giving them FREE banking facilities whilst paying for your own.

• You’re not doing business with them as they’re not paying for what you’ve given them, so you’ve nothing to lose.

• You’re paying interest on the money you’ve borrowed simply to provide your customer with FREE banking services.

Always remember, a sale is simply a gift, until it’s paid for.

Please, don’t give your business away.

Never leave key processes like sales communication, credit management, credit control and customer service to chance. 

Even if you don’t have cash flow problems today, it’s a serious risk for you in the post Covid-19 tomorrow.

A ‘Paid on Time’ culture will enable you to prevent late payment, protect your business, protect your people, and provide a profitable future, post Covid-19.

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