Best practice to encourage prompt payment by customers

As much as cash flow is about having more money coming in than going out, it is also about how fast money comes in – and an order book full of invoices paid within a week is worth much more than an identical order book where the money doesn’t come in for a month or more.

So anything you can do to encourage prompt payment by customers – and even early payment, if you can get it – will help to boost your business’s spending power, as well as contributing in your own way towards the health of the economy as a whole.

The faster money circulates, the more people can spend, and while none of us really relish paying tax, it all helps to fund the essential services and infrastructure that hold the country together.

Payment terms

To enforce payment terms, first you should make sure your customers agree to them, and you can’t do this just with a link in your email signature, so make sure every customer is fully aware of your terms right from the start.

If they fail to pay on time later, this gives you the legal right to enforce rules like late fees and statutory interest – and additional penalty fees if the customer expressly agreed to them upfront.

Invoice admin

Keep on top of your invoicing. If you’re running a small business single-handedly or with a fairly small team, it’s easy to let things like invoicing take a back seat on busy days, but the sooner you invoice, the sooner you will get paid – even by your promptest paying customers.

Be aware of the invoices you have outstanding at any one time. Don’t be afraid to send a polite reminder near to the deadline, and a stern one if the deadline is missed. Other businesses have busy days too, and it’s often an honest mistake if they miss an invoice they haven’t had to think about for 30 days.

Honesty and hardship

If you’re waiting on a big payment and it’s causing you cash flow difficulties, let the customer know. You don’t have to go into detail, but just explain that if it’s not paid on time, your business will really feel the effects.

Again, many customers just don’t realise the importance of paying you on time – and putting some personal context on it, without resorting to an all-out guilt trip, can help to speed things along.

Make some noise

Whatever approach you take to sending reminders, from a polite one-line note, to an all-out threat of small claims court action or a hardship appeal like the ones mentioned above, it pays to make some noise.

If your customer has a stack of pending invoices awaiting authorisation by the managing director, those who are shouting loudest will often find themselves propelled to the top of that pile, just so the accounts department can have a quiet day.

Pay promptly

You won’t always be on the receiving end – so when it comes to paying what you owe to your suppliers, do it as promptly as you can.

This can be difficult if your customers don’t pay you on time, but as long as it won’t put you out of business, doing your own bit to support prompt payment will all help to establish a culture of faster payments.

Cut them off

If a particular customer is taking liberties with their invoice deadlines, put a stop on the work you do for them.

This is another time when payment terms are important – you don’t want to be trapped in a supply agreement that means you have to keep providing goods or services whether they pay or not – but with a well worded arrangement, you can insist on payment in full before you carry out any further work.

Prompt payment incentives

Finally, consider whether it’s worth offering a small discount for prompt payment. This is similar to the way some suppliers offer a discount for paying by Direct Debit – on the basis that the small amount lost is worth it to get an invoice settled immediately rather than in a month or more’s time.

You can even use this as a sales gimmick, as many potential customers will appreciate the offer of lower prices in return for paying promptly, even if they eventually end up missing out on the discount when they forget to pay you in time in future months.