Late Payment, Short Payment, Non-Payment - How to Fight Back and Win
It's all about Cash-flow
When small companies go to the wall, as often as not the root cause is a cash-flow problem caused by late payment of invoices. Late payment can force a company or sole trader to borrow money merely to survive, or to cancel project work or reinvestment. Late payment introduces uncertainty and makes future planning impossible. Stated simply, late payment is illegal and immoral. It is not something to accept without a fight.
Singing for her supper
So Ellie walked into the Finance Office, sat down cross-legged on the floor and began to sing, loudly. I don't know if she's a good singer, or what repertoire she chose for her recital, but after thirty-five minutes she was still going strong. And after forty-five, she left with her long overdue invoice finally signed for payment.
Ellie's method of securing payment may have been unorthodox, but it worked, on that occasion. However, although it has a funny side, it's hard to imagine the level of frustration, even desperation, that would drive a normally undemonstrative person to such measures. Late, short or non-payment is the bane of the small business, sole trader and contractor community. And let's be very clear about this: however smoothly the defaulting company accountants may dress their message, late, short or non-payment is theft. In extreme cases it can even degenerate to slavery.
For the rest of this article, I'm only going to use the phrase 'late payment', because in my book you do not accept the existence of non-payment or even short payment unless you give up demanding your due remuneration. Let's start with a quick survey:
In your business experience
Why do companies pay late?
It is a disheartening experience. You quote for a job, agree terms and conditions, exchange contracts, and on the due date you submit your first invoice. When it falls due for payment, you check your account - nothing. You check daily for a week - still nothing. Disappointment grows to dread as you start wondering if this is going to be one of those jobs, the ones that cost you more than they're worth in stomach acid. Until now, you had a good relationship with your clients. You've delivered professionally and on time. Why are they behaving this way?
It's important to understand something about the inner workings of bigger companies and corporations. Your clients, with whom you made the initial agreement, are on the production side of the business. They genuinely understand and require what you do and would probably pay promptly if they could. They have no interest in destroying the relationship or, ultimately, your business. But the Finance Department is another story altogether.
Finance Department's loyalty is to the Company Cashflow. The company cashflow is a spreadsheet of money-in, money-out and balance. They are doing a good job if the balance is positive and rising. And you don't need to be a maths wizard to see that delaying payments is the easiest way of massaging the balance. It's certainly easier than generating income, something these non-productive people cannot do.
A vicious circle can set in here. If payments are allowed to slip by a month, then the following month's payments must slip too, because to catch up by doing a double payround would sink the ship.
In a downturn, when sales revenues drop, delaying payment is sometimes the only way a company can remain afloat, but you can be sure they won't go public with that information, at least not until it is too late.
It's a jungle. Here's how to survive it.
In a perfect world, companies would pay in full, on time, and everyone would be happy. But until that day comes, providers would do well to adopt defensive practices and procedures, most of which are basic common sense, but only once convinced that they are necessary:
- Do not start a job without a written agreement of payment terms
- Include in the above a clear statement of penalties for late payment
- Send your invoice as early as possible (as per agreed terms)
- Make sure there are no mistakes in your invoice (excuses for delay!)
- In a staged job, send regular Statements showing the status of all invoices (paid, current, due, overdue)
- If payment is late, take it up immediately with your real client. S/he has far more influence with the Finance Department that you do. It is not your business to bother with why payment is late. The why is not important.
- If your terms say that staged work is conditional on staged payments, stick to them. Even if the client is a nice guy. Make it clear that it is contractual, not personal, and down tools.
- Learn your rights. In the UK, use the resouces of the Better Payment Practice Group. Elsewhere, find the equivalent service.
In the Middle East, late payment is the norm. The situation is so bad that most contractors now insist on a large proportion up front, followed by regular staged payments. They deliberately overcharge in the knowledge that they will never receive the final payment. And most of the staged payments will be short as the paymasters will find some excuse or other to withhold a portion. It's interesting working here, but not for the faint-hearted.
And it was, of course, here that Ellie burst into song.
It would be interesting to find out if the phenomenon is universal (I suspect so) or if there are countries out there where everyone plays by the book. If there are, let me know - I'm already packed!
Thank you for reading!