Let's face it: slow payers can strangle your business's cash flow. It's a common headache that can escalate from a minor nuisance to a full-blown crisis, jeopardising your operations and growth. But before you write off another invoice or let frustration cloud your judgment, understand that there are strategic ways to handle these financial laggards. In this article, we're not sugar-coating the truth. We're giving you six hard-hitting strategies to tackle slow payers head-on and keep your cash flow healthy. Because in business, time is money, and you can't afford to let either slip through your fingers.

Setting Payment Expectations Prior to Work

Every new client that comes on board needs to be aware of your payment terms. This can be done by drawing up a contract which details when payments are due and the methods of payment accepted. You need to decide how quickly you want to receive funds, after the client has received their product or used your service and this should be made clear both on any contract and invoices received.

QuickConsult, Inc., a management consulting firm, has a strict policy of discussing payment terms during the initial client meeting. They provide a detailed contract that outlines the scope of work, payment milestones, and deadlines. This contract is signed by both parties, ensuring that clients are fully aware of their financial obligations from the outset. QuickConsult's clear communication regarding payment expectations has significantly reduced the incidence of late payments, maintaining a healthy cash flow for the business.

Moreover, QuickConsult includes a clause for late payment fees in their contracts. This acts as a deterrent for clients who might otherwise be lax about payment deadlines. By emphasising the consequences of late payments, QuickConsult reinforces the importance of adhering to the agreed-upon schedule, which has proven effective in minimising payment delays.

These days, cheques are simply not necessary. They’re time consuming to process and have the effect of greatly extending any given credit period. In all instances, push for a form of electronic payment; it’s easier and more efficient for all concerned. You could consider offering a probationary period for new clients such as payments being made in advance for the first 3 orders, prior to an account and credit line being set up.

Implementing Deposits

This very much depends upon the nature of your business. If you’re manufacturing something that requires you to invest heavily in materials, then it’s not unreasonable to ask for a deposit. This deposit should – at the very least, cover the expense of materials and possibly even initial labour costs. Taking deposits should ease cashflow and because of your client’s commitment, ease future cash flow.

Depending on the overall cost of the product or service, you might also want to schedule a further interim payment with the remainder to be received prior to completion or delivery. In this instance, you could invite them to see the completed product at your place of work / factory so that they have peace of mind.  

Custom Creations Co., a bespoke furniture manufacturer, is an example of this method: they require a 50% deposit before starting any project. This approach ensures that they cover at least half of their costs upfront, reducing the financial risk associated with custom orders. By doing so, they maintain a healthier cash flow and can manage their resources more effectively, even if a client delays the final payment.

The deposit also acts as a commitment from the client, which psychologically makes them more likely to fulfill the remaining payment promptly. Custom Creations Co. has found that since implementing this deposit system, the number of slow payers has significantly decreased, and their cash flow has become more predictable, allowing for better financial planning and stability.

Retainer Fees

If you find yourself providing a regular product or level of service to a client, you might want to consider a fixed monthly retainer fee based on their average annual spend with you. This not only guarantees a level of commitment and regular cash flow, but also, it’s a benefit to your client since your ‘working with them’ rather than for them – as with the traditional supplier approach. This means that you will be pro-active on their behalf and they have the benefit of knowing what they will pay each month.

Retained, set fees can be paid on a pre-set arrangement such as a regular standing order which means payments are always received on time. McKinsey & Company, a global management consulting firm, is known for its strategic advisory services to Fortune 500 companies and governments. To manage cash flow and mitigate the risk of slow payments, McKinsey often employs a retainer fee model. This model ensures that they receive a set amount of money upfront for a specified period, providing a predictable cash flow and reducing the uncertainty of payment delays. The retainer fee acts as a commitment from clients, which not only secures McKinsey's services but also aligns the interests of both parties for the duration of the consulting engagement.

By implementing retainer fees, McKinsey can better manage its resources and plan its projects without the added pressure of unpredictable revenue streams. This approach also allows the firm to maintain a high level of service by ensuring that they can allocate the appropriate time and expertise to each client, without being hindered by financial constraints caused by slow payments. For clients, the retainer model provides clarity on consulting costs and guarantees access to McKinsey's expertise when needed.

Do You Need to Give Extended Terms?

If you are working as an individual such as a business or marketing consultant, then consider whether it is even necessary to give 30 day’s payment terms, particularly if you are working for them on a regular basis. In such a capacity, it’s best to class oneself as an extension of your client’s team and as such, you have every right to expect payment at the end of each working month just as the rest of the workforce. Once again, in such an instance, I would suggest a fixed retainer fee.

Good Accounting and New Client Checks

Invoices should be sent out efficiently either immediately after work is completed OR at a set time each month – along with other client / customer invoices – again, with payment terms stated clearly. A follow up reminder, if payment is not received by the due date, should be sent either by post or email2, although email is best because it’s immediate and more environmentally aware. There are software packages available which can automate this process - or a simple spreadsheet may suffice!

You should NEVER take any new client at face value, despite their size, status or standing! Always look into their financial background; this can be done easily online and whilst not fool proof, it will give you a deeper understanding of the business that you’re dealing with.

Managing Late Payments

If a payment is not received on time, it is good business practice to send a reminder letter or email in the first instance with extended payment dates such as payable within 7 days. Regardless of your previous experience with late payers, it may just be that this client has innocently forgotten or perhaps been on holiday and just needs a gentle prompt. Ensure that you are contacting the correct person who is responsible for transferring the funds. If the monies are still outstanding after the extended deadline, call and speak with the client but keep your cool and remain professional.

If the client states that they are having difficulty paying, offer them an instalment payment plan. This method will keep the relationship positive whilst increasing your chance of at least receiving some funds - should the client’s financial situation worsen.

Remember, whatever your business model and terms of business, it’s vital to achieve a positive cash flow and this means keeping on top of payments. Establish your business terms as part of your tender / business -proposal and ensure they’re agreed prior to commencing your business relationship. This will negate the need for ‘difficult’ conversations later. However, always be receptive to business climate changes and any difficulties your clients might be experiencing. You might offer a temporary period of reduced fees or prompt settlement discounts. Some fee can often be better than none and sometimes such assistance greatly increases loyalty and is remembered when times improve.

In conclusion, while these strategies can significantly reduce the number of slow payers, the reality is that you will occasionally encounter them. It's a delicate balance between maintaining a firm stance on your payment terms and being empathetic to genuine cases of financial difficulty. How do you draw the line between being understanding and protecting your business's cash flow? Have you ever made concessions that you later regretted, or perhaps your flexibility paid off in client loyalty and long-term business? Share your experiences and thoughts below. At Venture Planner, we understand the importance of cash flow management for the success of your business. Our platform is designed to help you create a business plan that includes robust financial strategies, including how to handle slow payers. By preparing in advance with a comprehensive plan, you can navigate these challenges more effectively and keep your business thriving