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Tyers Accountancy

How to: Getting paid on time

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Half of all small and medium size businesses struggle with overdue payments and many cannot survive the cashflow problems that they create. Lessons for small business:

Don’t allow sales to overrule or sidestep credit management.

Sales are essential, but they can be pointless or even damaging if the customer is unlikely to pay. Even as a sole trader you should still try to think twice about each prospective sale: consider each sale once as a salesman, and then as a credit controller. Should the sale be made?

Use credit management as an opportunity to create sales, not prevent them

Credit management should aim to determine the set of conditions under which you can sell on credit to each individual customer. Know as much as possible about the creditworthiness and payment habits of your customers, through a good relationship and by using credit information. You can even win business by rewarding the prompt payers.

Develop a credit policy and stick to it

The policy only needs to be brief. It should be clear about when you are willing to give credit, how much, and to whom. Notify your customers of the policy each time in writing before each sale.

Balance the costs

If you sell on credit you need to balance the amounts of cash both coming in and flowing out of your business. A profit on paper can quickly turn into a loss after you add in the costs of financing your working capital, chasing late payments, and absorbing non-payment. Always in mind this real cost of extending credit .

Be organised with your invoicing and collections

Keep to a routine for invoicing and collections and stick to it. Send polite reminders before the money is due. Some customers will look for signs of disorganisation and use them to determine which suppliers they can get away with paying late. By being organised you don’t present yourself as an easy target for late payment.

Know your rights

The law gives you as a supplier the ability to charge interest on overdue payments. The ‘statutory interest’ you can charge for business to business transactions is the Bank of England base rate plus 8%. Most businesses never make use of this right but it’s still useful to clarify, in writing, that you reserve the right to charge interest. Some suppliers then invoice their customers for the additional interest as soon as it becomes due. This is rarely to receive the extra money, but is with the intent of jolting customers into paying on time.

This is a big subject that I have only covered briefly. Please call if you need any further help.