A sale is not income: Tips on validating customers and getting paid

It is a very rewarding feeling when you make a sale. But if the customer holds out paying or becomes a bad debt it can really damage your cash flow and be very demoralising. What can you do to reduce the risk and the stress of a bad sale?

There has been a dramatic rise in the value of delayed payments to SMEs in the UK. The figure is estimated at £6.7bn in 2018 compared to £2.6bn in 2017.

I don't want this to be all doom and gloom, but armed with the knowledge about the turbulent payment culture we face, what can you do to reduce your risk and protect your cashflow?

1. Be clear with your payment terms

For SMEs 30 days is standard. However, don't let that stop you having a shorter term. It is your business, you call the shots.

Also, I am a huge fan of deposits. It does depend on your business model, but if you can charge 35-40% in advance this will at least cover the costs of materials and some of your time to deliver the goods or service.

A top trick is to provide a discount for early payment. You can offer 5% off for example, for settlement within five days. A win-win for both parties (factor these discounts into your pricing model).

2. Validate customers

a) Do a little Googling. It takes around five mins on Companies House. Red flags include late filings, 'Gazette' notices (being struck off) and negative net assets on their balance sheet. If they claim they have turned things around, I would still ask for a gesture of goodwill, i.e. deposit or retainer.

b) Plus, look at their director's history on Companies House. Do you see a pattern of dissolved companies every few years? If so, it could signal an entrepreneur that runs up debts and winds up frequently.

c) Check for any negative press coverage.

d) Make sure they sign a contract or a sales agreement of some sort with you. If they refuse to enter into any form of contract with you that is extremely risky and best to ask for payment in advance or a decent deposit. Otherwise, walk away.

e) Don't be afraid to ask around. While you can't libel anyone, the SME community is small and bad payers get a name for themselves.

f) Ask about other suppliers they use to get a reference. This is often the only way to validate a sole trader. Plus, if they are a 'demanding' client you can factor in the extra time into your quote.

3. If you use sales reps or agents make sure their payment is tied to invoice payments

A strong salesperson knows they have a responsibility to convert sales into payment. However, without the incentive to qualify sales and reduce the risk of none payment for you, they can become like an untracked scud missile.

Therefore, make it clear in their contracts that they only get a commission on cleared sales, i.e. paid amounts. Make sure all commissions are based excluding VAT.

4. Quality control/expectation management

Disputed invoices are time-consuming.

For physical goods this can be a more black and white process. If a customer orders 20 blue pens and you supplied 40 red, well you can't really expect them to pay or cover the cost of returning.

Therefore, at the point of sale, make sure there is a review of orders before shipping. Plus have a clear customer service process to deal with issues.

If you are providing a service, make sure your service level agreement or the contract is explicit not just about what you will do but also what you won't do.

Throughout the delivery process, communication is key. Get positive feedback in writing. Plus, you could be extremely busy working in the background. But if a client cannot see this, they will start to dispute payments. Therefore, provide updates on progress at least once a week to let them see the value you are delivering.

This all helps to build a case if you do have to go down the small claims route. (As an aside, winning a small claim is still no guarantee of payment; sad but true).

5. Get a purchase order number (PO)

There is a high chance with larger clients they will have a payment policy of no order no pay. What this means is that if you submit an invoice with no PO number, the accounts payable team will not process. A PO number in effect is a pre-approval to pay.

Therefore, when you get an order, make sure you ask if they use PO numbers and insist on getting one for your order and quoting on the invoice.

6. Check addresses

Back when I was a financial controller I would get several calls a week from people chasing invoices we simply never received. Therefore, it's best to insist on email addresses and phone numbers for the financial controller/head of finance when dealing with larger companies. Review contact details once a year.

For SME sales, send a polite email to your contact a few days before due to check up on progress. Honest mistakes happen so it's best to communicate to defuse situations before they arise. Pick up the phone etc.

7. Financing

For some industries, factoring is a consideration. By selling on the value of an invoice at a discount ensures payment and passes the risk onto another company.

Factoring can be expensive, but with credit cards, short term leading and overdraft costs being higher. It might be a necessity to consider to keep your cash flow in check. Especially if you are keen to start scaling and face longer payment terms from larger customers.

Final thoughts

No one has a crystal ball to be 100% sure that an invoice will be settled. However, you can help to stack the odds in your favour with due diligence, deposits and being prepared to walk away from a bad customer.

Hopefully the above is some food for thought and can be tailored to suit your business. It may appear a lot of work initially, but investing some time now can save far more time down the line on chasing, rearranging your finances and the sleepless nights worrying about money.