Gary Alder CEng MIET – BMBJV, Electrical Lead at Tideway, explains why you need to tighten up your payment terms and why accepting increased payment periods could be catastrophic for a SME business.
Receiving payment on time is vital to a business’ ability to stay afloat, but what if you aren’t getting paid on time? The strong likelihood is that this will harm cash flow for companies of all sizes – from the one-man-band through to the major conglomerates.
As a former Director of a medium-sized business, I’ve personally experienced a range of payment terms. Typically, most businesses will request 30-day payment terms, however an increased trend, post-recession, has seen companies requesting 60 to 90-day payment terms.
When faced with large financial opportunities and projects, being offered 90-day payment terms, in particular, becomes an option that a business seriously needs to weigh-up before making a commitment.
I fell foul of this particular pitfall in my own business when we were subcontracting for the same company across two separate projects. After initially agreeing to the 90-day terms I then realised that getting wholesalers, agencies and all manner of suppliers to facilitate longer payment terms was not only incredibly difficult, but also hurting the industry at the same time.
It was a mistake to accept those terms, and a significant lesson that I’ve learned.
It also begs the question that with the ever-increasing number of large projects running beyond programme, how long can the industry realistically continue to operate in this manner?
Although it’s completely understandable that all contractors want to pass on risk, the rut needs to be stopped soon to avoid long established businesses from disappearing. Again, I can talk from experience as I’ve personally lost a long-term business which had been operating successfully for over 45 years but, due to late payments, was unable to continue trading.
Can the electrical industry look to other sectors and follow suit?
Many service industries require deposits, or payment upfront. For me, the responsibility must start with the client. If the client has the budget to spend, regardless of size (domestic, commercial or industrial), they cannot operate in a way that will impact their supply chain and must instead look beyond their own bottom lines when tendering projects.
Some clients within the water industry have led the way in mandating 30-day payment terms for all third parties associated with their contract. Many businesses will also operate fairly and allow costs to be covered, ensuring that they don’t operate at a loss.
In a recent survey I conducted, I asked if domestic electricians were modernising and beginning to utilise mobile card payment services in their day-to-day services. Surprisingly, 60% of the 140 surveyed stated that they didn’t have a card payment facility. Surely in this modern era, with cash becoming increasingly obsolete and electronic payments becoming ‘the norm’, electricians need to move with the times.
National statistics show us 20% of small businesses fail within the first year, rising to 50% over a five-year period. A regular mantra that I see regularly on social media from domestic electricians is ‘finding the right client’, but this isn’t always possible, so businesses need to learn how to safeguard their cash flow.
Here are some key fundamentals that I’d recommend for any electricians that are looking to start up a business:
Always provide a quotation
This gives you the opportunity to document clarifications and exclusions, as well as what you’re providing within your services. It may take a bit of time, but this will help to avoid time being wasted on agreeing what was/wasn’t included originally or, even worse, arguing over payment.
Insert payment terms within the quotation
When a client accepts a quotation, it should be clear what they’re agreeing to.
Never provide a quotation without first viewing the project and meeting the client
This offers a valuable opportunity for the client to meet you and to understand your core values. Most domestic installations will heavily factor this in alongside bottom-line cost.
Avoid being negotiated into a price you aren’t willing to give
Understand your overheads that need to be made. Negotiating below this will ultimately affect your hourly rate as, theoretically, the job can’t be done any quicker and overheads remain a constant.
If possible, utilise estimation software
These packages typically have standard values for the installation of cabling, containment and equipment and can ensure consistency across all quotations produced.
Detail payment milestones
Typically for domestic works this can be ‘first fix’, followed by ‘second fix’. Every opportunity to ensure you’re covering costs as you progress through a project, the better it will be for you in the long run. Clearly stating these from the outset also enables budget management for your client.
I’ve noticed recently that there is a trend for medium-sized business with larger turnovers to offer a discount, which incentivises on-time payment. Through my own experience, I’ve found this to be a very difficult one to manage, particularly if you incur interest on late payments.
In a nutshell, the industry needs to become smarter about how we utilise payment terms and methods across the board. Electronic transfers, payment terms and card payments are all at our disposal to ensure a smoother, stress-free life, so let’s start taking advantage of them.