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The problem with late payments

Written by Mark Scott on Thursday, 08 December 2016. Posted in Finance

With the franchising sector in such a healthy state, it’s important that we don’t let debtors derail businesses and cause terminal cashflow problems

The problem with late payments

A recent survey by the bfa and NatWest revealed that franchising as a sector has much to be optimistic about. Many of the most familiar names on the high street are franchises, although consumers may not always know it. Franchises in the UK generate around £15.1bn a year and over the past decade, the number of people employed in the industry has increased by 70% to 621,000 while its contribution to the economy has grown by 46%. But even the fastest-growing and most successful franchises can get tripped over by the chronic problem of late payments. While the industry remains buoyant, there is a worrying trend of late payments that’s taking its toll on some franchises.

The scale of the problem

At NatWest, we’ve seen first-hand the knock-on effect that late payments can have on some of our franchisee customers. The inability to pay employees and suppliers can lead to an increase in financial stress. Whether your turnover is £2m or £25m, being owed money can put a strain on your supply chain, force you to lay off staff, cut back on growth or acquisitions and even create a culture where you have to write off payments on a regular basis.

Late payments can strangle the growth of small businesses in particular, cutting off the supply of funds that enable a business to progress and develop. And even for larger companies that have their own finance teams, the problem of late payments can still have a massive effect. When a business doesn’t get paid, it can have a huge knock-on effect and cause serious financial problems. And while the presence of cashflow issues may seem to indicate that a business is struggling, the opposite is often true. That’s because as a franchise grows and looks to expand, the money it needs to pay for work in progress also increases. These overheads are funded by income from previous jobs or suppliers, so late payments can hinder a firm’s ability to flourish.

Several reports also paint a concerning picture. A study by Ormsby Street, the fintech startup, revealed that the average time taken to pay a supplier among a list of 20 major retailers they looked at was 45 days beyond terms. Furthermore, the Federation of Small Businesses (FSB) has found just how severe late payments can be.

Of the small businesses they studied, 37% had run into cashflow difficulties, 30% had turned to an overdraft to tide them over and 20% said late payments have hit their profits. And for some, the stress was too much and their business went under. The FSB also found that in 2014, if it weren’t for payments being tardy, 50,000 business deaths could have been avoided. This would have added £2.5bn to the UK economy – a not insignificant sum.

The road to recovery?

The amount owed in late payments to businesses back in 2008 was £18.6bn. But since then, the figure has spiralled to around £40bn, which is why the new Enterprise Bill was announced in the Queen’s speech in 2015. Under the voluntary Prompt Payment Code, businesses are encouraged to pay debts within 30 days as standard, with a 60-day maximum limit. Part of this was the appointment of a small business commissioner to tackle late payments who can name and shame companies that persistently fail to pay on time. With these measures, the problem is expected to improve sooner rather than later.

But while action on the part of government is welcome, franchises also need to be proactive to protect themselves. It isn’t enough to send an invoice and wait for a response and payment – you need to apply pressure on those who just aren’t coughing up, while remaining tactful and polite so no bridges are burned. And when you are chasing payment, ensure you’re contacting someone in a position to take action at the customer’s accounts office. Also bear in mind that emails can be easily ignored: a conversation is more likely to result in success when chasing late payment. Experience helps too: over time, the people working in your accounts department will develop relationships with their counterparts and figure out who are the good payers and who might need some prompting.

However, it’s not just about chasing debtors: preventing late payments starts when you’re drawing up invoices. Your invoices must have the correct information, including clear payment terms.

Getting the purchase order number or other details wrong will delay payment. It’s also advisable to run a credit check before working with a new customer to ensure they’re creditworthy, particularly ahead of large orders. It can also help to include a late-payments clause that lets people know that if they are late, they’ll be charged interest. Having to go to the higher powers to action this may seem a last resort but my advice is to not let problems spiral out of control.

Ultimately, franchises should be aware of their capital reserves and cashflow forecasts and do everything they can to prevent late payments so surprises can be minimised. It always pays to keep track of your cashflow. You may have large reserves enabling you to wait a bit longer for a payment but this will soon be eaten into if too many customers begin to drag their feet. Forecasting 12 months ahead to know exactly what money will be needed and when is crucial.

Whatever your issues with late payments, there are solutions and preventative measures. All the experts advise that your top priority should be to deal with the problem fast, accurately and politely. Sometimes just a little nudge is all it takes.

About the Author

Mark Scott

Mark Scott

Having joined NatWest back in 1982, Mark Scott has clocked up years of experience in banking and advising British franchises about their finance needs. And as director of franchise development at NatWest, Scott's a regular speaker at industry events.

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