Preventing small businesses from shutting up shop

With 50,000 businesses closing due to late payments, LSCA Business Board member Vicky Andrew examines the steps a micro business can take to tackle late payment in London Accountant.

A year ago I wrote an article about the importance of micro businesses in the UK. This was the start of a planned series on the subject; in the summer, I followed up with a piece about the  challenges of scaling up.

This month, I am returning to this theme, by looking at one of the finance issues faced by micro-businesses; late payment by customers.

According to the Federation of Small Businesses, which has campaigned tirelessly on this issue, micro businesses are owed an average of £6,000 by late-paying customers. Some of these customers may be even smaller businesses and individuals; others are much larger firms.

Research shows that around a third of micro businesses have experienced cash flow difficulties and/or have been forced to use an overdraft, and around a fifth believe that late payment has led to a restriction in growth. It is estimated that around 50,000 businesses close each year because payments are not made on time.

There are steps a micro business can take to minimise the risk of late payment, eg;

  • Checking credit ratings and obtaining references before granting credit to new customers;
  • Taking payment in advance for part or all of a large piece of work;
  • Moving away from accepting cheques and cash, and towards card payments and direct bank transfers (no more “the cheque is in the post”!);
  • Regularly monitoring debtor levels as a percentage of turnover, and thereby knowing the number of “debtor days” (average time taken to pay an invoice);
  • Charging statutory interest (set at base rate + 8%) on late payments, specified in all customer contracts and on invoices, and;
  • Following standard credit control procedures, ie, sending a late payment reminder letter, followed by a second letter, followed by a letter before action, then commencing legal action, using Money Claim Online (the Small Claims Court) for amounts up to £100,000. 

These steps will help the micro-business owner reduce the amount of bad debt and late payment, although they cannot prevent the time-cost and mental energy wasted in pursuing late- and non-payment. Moreover, some of the problems are caused by much larger firms in unequal relationships with smaller businesses. Indeed, some practices amount to what can only be described as supply-chain bullying.

Having secured an offer to supply a much larger firm, a micro-business owner will not be in an equal bargaining position when negotiating contract terms. Even if the contract seems fair, subsequent practices may not be.

In addition to simply paying late (beyond the contractually agreed period), there may be retrospective discounting (where a larger firm forces a discount of an already agreed price), or “paying-to-stay” (where a smaller firm pays a larger one simply for the privilege of remain a supplier, but without the guarantee of any actual orders).

Fighting such practice is beyond the power of the individual micro business; this situation can only be dealt with by legislation, brought about by campaigning organisations.

About the author

Vicky Andrew is an ICAEW Chartered Accountant and Director of Millcove Solutions Ltd. The company trades as Vicky Andrew and Associates and is a consultancy providing advice to micro-businesses and accountancy firms throughout the UK. Vicky has worked with micro-businesses for more than 30 years, specialising in firms with turnover of up to £1m.

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