Improving payments terms is undoubtedly a beneficial move for businesses. However before you go ahead and implement a late payment penalty, it is important to ensure that your accounts receivable process is as efficient and effective as it could be. An effective accounts receivable process is characterised by:

• The establishment of clear credit terms at the outset of a relationship.
• Prompt issuance of invoices.
• Tracking of accounts receivable to identify slow-paying customers.
• Regular communication with customers to identify and resolve problems before invoices become overdue.
• Action taken against a debtor if they are persistently delinquent.

If your accounts receivable process is working as it should be, and you wish to pursue the late payments penalty, there are a few things you need to consider:

• Do your terms and conditions adhere with any regulation/legislation that applies to your business/industry?
• How will you communicate your new terms to your existing customers?
• This move may result in customer backlash - are you prepared to lose customers? When considering this you must remember that a persistently delinquent payer is a significant drain on internal resources - some customers are not worth having!

A late payment fee is not guaranteed to improve payment behaviour, however if it does, it will undoubtedly have a positive impact on your cashflow.