What can you do about late payments?

Late payments are an increasingly hot topic. Many small businesses aren’t able to hire staff, improve their business or grow fast due to a cash flow gap. So, why do late payments matter? Because when a large business takes advantage of its market power to unilaterally extend or delay payments to its SME suppliers it either hinders the growth of those suppliers or pushes them towards bankruptcy.

This is reprehensible because:
1. It steals jobs and economic growth from all of us and reduces the cohesiveness of our society.
2. It unfairly targets SME owners who are major contributors to our society.
3. It lowers Federal and State tax collection.

How can I justify making these statements?
Let’s start with the facts on the contribution of SMEs to our economy and society. Did you know SMEs employ 68% of the workforce, generate 55% of Total Industry Income and 66% of Total Industry Profit?

What about stealing jobs and economic growth from all of us? We need to first begin with a little financial education. The trading activity of a business involves the sale of stock and the collection of debtors related to those sales. To trade, a business needs capital, which is just a fancy term for the money a business raises from its owners and/or its bankers. The amount of capital used to support trading is called working capital.

A business owner can use the following equation to quantify the capital tied up in Working Capital:

∑ Stock + ∑ Debtors – ∑ Creditors = Working Capital

You will note that Creditors are a deduction in this equation. This is because Creditors are a source of finance for the trading of a business. Using the working capital equation, we can see that when Debtors increase, all other things being equal, the amount of money tied up in working capital also increases. So, what causes Debtors to increase? One cause is business growth. Higher Sales are usually accompanied by higher debtors. Another is a unilateral extension of payment terms, or a deliberate delay to payment times by your customers.

How do SMEs feel about late payments?
SMEs can normally manage one, but money is not as freely available to SMEs. To the extent that it is late/extended payments causing the increase in working capital then growth suffers.

The working capital equation also helps us understand why payment terms are extended and/or delayed. If a large business can delay paying its creditors (ie: its SME suppliers) it lowers its working capital. Doing this allows it to redeploy that freed-up capital elsewhere in its business.

Why don’t SMEs do this also?
Well, for most, this is not a sustainable strategy. When they do, it’s usually an involuntary reaction caused by mismanagement (losses) or delayed payments requiring them to conserve their scarce capital. Ultimately, if an SME can’t pay its creditors then it will go bust.

It is hardly surprising then that most SME owners get hot under the collar when a large customer, by delaying payment, puts their planned growth and/or their business at risk.

So, what can an SME owner do?
1. Make sure all your customers know your payment terms.
2. Enforce those terms by calling late payers and requesting payment. When calling explain that you delivered your side of the bargain by supplying the quantity and quality of product/service requested and now you are asking the buyer to deliver on their side of the bargain by paying on time.
3. Work to diversify and expand your client base. You have more options when you are not reliant on one or two significant customers. You get to redeploy the time freed up into growing a business with customers who will pay.
4. Have a budget that helps you identify the working capital needed for growth. Allow a buffer. If you can’t produce a budget easily find someone who can.

How do you feel about late payments? Let us now by commenting below.

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Related articles:
1. Late payment causing major strain
2. Technology to help with late payments
3. What do small business owners think of late payments?

Series 10 Episode 6: Tech to Help with Late Payments

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Michael Stapleton
Michael is a founding member of the Association of Virtual CFOs. He runs his own Virtual CFO practice in Melbourne, helping owners of small and medium-sized businesses use their numbers to make financially informed decisions.


  1. I get that late payments are sometimes part of doing business, but what I really don’t like is having to chase up certain businesses 3 or 4 times before receiving payment. Some of them I suspect don’t even intend to pay until they get a reminder! So for us, one of the most annoying parts of late payments is the loss of admin time involved in chasing up people.

    • You need to implement Terms Of Trade that incur penalties for tardy payments and allow you to add the cost of time lost to chasing payments as well as the cost of engaging a Mercantile Agent should that eventuate.
      The Terms of Trade MUST be signed by your customer prior to transacting.
      Failing to do this means that the payment details on the bottom of your invoice might as well be written in in purple crayon: they are instructions on how to pay, not a legally binding obligation to do so.
      The Terms of Trade need to be monitored and updated in accordance with any changes in legislation.
      Feel free to contact me if you would like more information on how to use our paperless, streamlined system to achieve this.

  2. Some businesses employ part time bookkeepers or have other reasons that don’t allow them to get to processing their invoices quickly. Using true eInvoicing means a supplier can send their invoice direct to the accounting system of their customer. The invoices is in the system and processed faster often allowing the supplier to be paid on time.
    Some very simple add-on options exist for small businesses using cloud accounting systems. If you use Xero, MYOB, SageOne, Reckon, Saasu or Quickbooks then have a look at Link4. It’s designed specifically for small business. Sending your invoices instantly should reduce the amount of overdue invoices.


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