By Laura Birchall, Business Advice Consultant at Sage
Recent legislation from the EU, the late payments directive obliges public authorities to pay for goods and services within 30 calendar days or (in very exceptional circumstances, within 60 days) and businesses to pay their invoices within 60 calendar days, unless they expressly agree otherwise and if it is not grossly unfair to the creditor.
With this new directive in place, businesses are entitled to claim interest for late payments and can also automatically obtain a minimum fixed amount of €40 as a compensation for payment recovery costs. They can also claim compensation for all remaining reasonable recovery costs. The statutory interest rate for late payment is increased to at least eight percentage points above the European Central Bank’s reference rate. Public authorities are not allowed to fix an interest rate for late payment below this threshold.
What this means for your business in theory is that it should help encourage more prompt payments. It will be especially helpful if you often find yourself in the situation of not getting paid on time.
There is a late payment option within Sage 50 Accounts and Sage Instant Accounts which allows you to charge late payers interest on any overdue amount once a certain period of time has passed. Sage has a “credit charge” wizard that allows you to apply interest to overdue sales invoices. This can be set up on individual customer accounts providing they have accepted credit terms. The wizard option takes you step by step through applying interest to each customer or on specific transactions.
The credit charge wizard brings together a number of areas in the accounts package reducing the time spent updating this information. Businesses can allocate these charges against departments within the company, meaning when a departmental analysis report is run, they can see how much money is being assigned to separate areas of the business giving greater visibility of potentially problematic areas.
By integrating SagePay into your Sage 50 or Sage Instant Accounts and placing a pay now button in your email invoices you can also allow customers to pay you instantly online.
In my experience of talking to business owners that call our business advice team, companies often feel that when customers refuse to pay, adding interest doesn’t make a big difference. Once it gets to the point where someone owes you money and you are adding interest and trying to pursue it – it’s almost beyond recovery.
Customers who are overdue their terms are immediately highlighted in red in both Sage 50 and Sage Instant Accounts so you can follow up on them promptly and therefore avoid aged debt getting out of your control.
Both Sage 50 and Sage Instant Accounts have an Aged Balances tab, generating a report quickly highlighting credit limits, balance and YTD transactions by customer.
The customer dashboard in Instant Accounts and Sage 50 will give users a cash overview and aged debt graph allowing them a snap shot into their debtors.
It is preferable to put good cash flow management and credit control procedures in place for your business. Set and manage credit terms with customers, keep on top of who owes you money and who you owe money to. Avoid selling more to customers who don’t pay so that the situation does not get out of hand. Another option is to use a credit check facility before giving credit terms to customers.
The new measures in the recent directive are optional for businesses, in that it gives you as a business owner the right to take action but you not obliged to do so. In some circumstances, you may wish to extend the payment period for some days or weeks to keep a good commercial relationship but you may also not want to set this precedent. Whatever you choose to do, our accounts software has the functionality to flag unpaid invoices and allow you to add interest if you wish to. Once your business is set up to effectively deal with credit control you minimise the risk of cash flow problems.
Download our free Ebook on How To Manage The Cash Flow In Your Business.