Cash Flow Credit Management Late payments
5 mins read

The impact of late payments on cash flow and what to do about it

Late invoice payments are among the most challenging factors to manage when running a business. They create uneven cash flow, which can have a number of serious flow-on effects such as problems paying invoices and costs such as wages and utilities, difficulty planning for the future and, in extreme cases, can even force businesses to close down.

It is very easy to waste precious time chasing unpaid invoices that could otherwise be allocated to more strategic endeavours. If this sounds all too familiar, you’re not alone. A CreditorWatch survey of Australian businesses found that:

  • 82% of respondents had experienced late or overdue payments in the six months to December 2023.
  • Over a third (37%) of businesses surveyed commonly experienced payments more than 30 days late.
  • Businesses in the construction, manufacturing, and information, media and telecommunications industries recorded the highest rate of late payments at more than 45 days past the due date.

The situation is even more difficult for small businesses to manage, with two-thirds of those surveyed (66%) feeling they have less bargaining power with larger firms. However, with the right tools and streamlined processes, any business can work to improve cash flow and get on top of late payments once and for all.

How to take control of late payments and uneven cash flow

There are solutions for your business that may not only prevent late payments from occurring in the first place but also help you receive payment faster. In fact, CreditorWatch research shows that the most popular methods used to reduce exposure to late payments are:

  • Automated reminders – 62%
  • Automatic alerts when credit risk changes – 43%
  • Adjusting payment terms and conditions – 37%

Some of the tools and processes businesses are utilising to prevent late payments and improve poor cash flow include:

Conduct credit checks on new customers

Gone are the days of relying on good faith and a handshake. Before extending credit to a new entity, it is essential to conduct a thorough credit check. Business credit reports can be a lifeline for businesses looking to avoid late payments.

By performing a credit check, you’ll discover a new customer’s credit history and credit score. This can provide a strong indicator of their past payment behaviour and financial stability. By conducting credit checks on new customers, you can identify potential risks and make informed decisions about whether to offer credit terms.

Credit application forms

It’s incredibly easy for mistakes and gaps in data to occur if you’re still relying on paper-based credit applications. Implementing an automated online credit application process is crucial in gathering essential information about your trading partners’ financial health.

These forms will include their business details, banking information, trade references and authorisation for credit checks, which can help simplify customer applications and speed up your internal credit process. Automation of credit applications not only helps quickly assess creditworthiness but also establishes clear terms and expectations from the outset.

Establish a proper collections process

Establish strong processes for promptly handling overdue payments. This may involve sending timely reminders for overdue payments via different channels, like email, phone calls, and letters. By adopting a systematic approach, you ensure active monitoring and follow-up on debts, reducing the likelihood of late payments.

You can make the process even more streamlined by using automated debt collection tools. These tools can help you get paid faster and eliminate the need to chase outstanding payments manually. Automated debt collection tools integrate with your accounting software, allowing you to quickly gain visibility across all your debtors, identify risk indicators and prioritise collections.

Additionally, automating the debt collection process may help maintain supplier relationships. Using an objective third party to manage your communications may minimise tensions and ensure payment is actioned.

Case study:

Within four months of using the CreditorWatch Collect tool, Gateway Containers:

  • Collected $292,000 
  • Reduced the proportion of overdue invoices from a massive 90% down to 62% 
  • Reduced the average monthly amount overdue by 34%.

Read the full case study here.

Escalate outstanding payments

To escalate outstanding payments you can use our Debtor Management tool. Available to CreditorWatch customers at no extra cost, it makes it simple to formally escalate overdue invoices, with collection letters that are automatically generated, in just a few clicks.

You simply connect your Xero, MYOB Business or QuickBooks account so you can select the relevant account and invoices to include in the collection letters. We recommend using Debtor Management to support a proactive collections process, such as automated invoice reminders.

Be firm on consequences

Clearly communicate the consequences of missed payments in your credit terms and conditions. These consequences may include a switch to cash-on-delivery, late payment fees or suspension of services or credit privileges. Additionally, consider reporting defaults to credit reporting bureaus like CreditorWatch to alert other businesses about the delinquent customer’s payment history and acting as a deterrent against future late payments.

Outsource your debt collections

If your efforts to recover outstanding payments internally prove unsuccessful, consider engaging the services of a reputable debt collection agency. Debt collectors specialise in negotiating with late-paying businesses and recovering unpaid debts on your behalf. While outsourcing may incur additional costs, it can be an effective solution for recovering overdue payments and freeing up your resources for other business priorities.

Take legal action when appropriate

As a last resort, explore the option of legal action against persistent bad debtors. Although, before pursuing legal proceedings, it may be worth assessing the likelihood of success based on factors such as the debt amount and evidence of the debt. For example, if you rely on a handshake agreement rather than a credit application, it may be challenging to prove your case. Legal action can be time-consuming and costly, so weighing the potential benefits against the associated risks and expenses is crucial.

Protect your cash flow with the right tools

To make more informed credit decisions, you need appropriate debt collection processes and tools. CreditorWatch’s suite of tools, such as automated customer credit checks and credit applications, can help you trade with more confidence.

By avoiding customers likely to make late payments, businesses can protect their cash flow, manage financial risks, maintain client relationships and sustain growth in a competitive environment. For more information, please do not hesitate to contact our team today.

accounts receivable collections credit management credit risk credit risk management creditorwatch collect debt recovery debtor management finance
Business Development Manager
Arman joined CreditorWatch in January 2021. He has more than 13 years experience in sales. His role includes empowering businesses to make smart decisions through unique, data driven, insights.. He is passionate about assisting businesses mitigate debtor and supplier financial related risks through CreditorWatch’s reporting and monitoring capabilities. With a client-base across all industries, he specialises in construction, manufacturing, and freight and logistic services.
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