Late Payments

Late payers are never good for business. They can cause huge problems for companies cash flow and for the self employed it can make the difference between you being able to pay your mortgage or not.

Late payment legislation for business to business transactions was updated in March 2013 to implement a European Directive to simplify the procedures across the EU. This legislation is not just for Limited companies, it is for all businesses so here’s what you can do.

Payment Terms

It is always best practice to agree payment terms with a client before commencing work, however this is not always possible and now you don’t have to.

Unless agreed otherwise a payment is late if not paid after 60 days for business to business or 30 days for business to public sector transactions.

Charging Interest on Late Payments

You can charge statutory interest at 8% above the Bank of England base rate. If the debt becomes late in the 1^st 6 months of the year you use the base rate issued on 31^st December, the 2^nd 6 months of the year use the base rate issued at 30^th June. It’s currently 0.5% so you can charge 8.5%.

Calculating Late Payment Interest

Use the following formula:

Debt x Interest rate % x number of days late ÷ 365 =

Additional Charges

Fixed fees can be added to the debt

•         £40 for debts up to £999.99
•         £70 for debts from £1000 to £9999.99
•         £100 for debts of £10k and above

If your costs for chasing your payment are more than the fixed fees above, you can claim the extra expense as ‘reasonable costs’ so you should never be out of pocket.

References & more detailed guidance can be found:

• Directive 2011/7/EU on combating late payment in commercial transactions.
• Dept for Business Innovation and Skills.
• Base Rates found on Bank of England Website.

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The Balance Sheet Explained

When going through a set of accounts with clients most people can grasp the Profit and Loss Accounts – income going in, expenses coming off = profit or loss at the end, simple but when you get to the Balance Sheet a glazed expression usually appears.

We only produce a Balance Sheet as part of your Financial Statements if it is either a statutory requirement as is the case for a limited company or for others if we feel it is necessary.  However it is only useful if you understand what the figures mean so here’s a quick low down on the main components.

Firstly the layout has to follow accounting standards so is always laid out in a similar format normally with two columns for each financial year and usually showing two years for comparison and with the categories in the following order.

Assets

An asset is simply something the business owns.

• There are Fixed or Tangible assets – an asset that is a physical thing that isn’t going anywhere soon like a property, machinery or vehicles.
• There are also Intangible assets – something the business owns that isn’t physical such as intellectual rights, brands & patents.

Most of these items are depreciated each year with the written down value being shown on the balance sheet.

Debtors

This means money you are owed.  Items such as:

• Trade Debtors – your outstanding sales invoices
• Stock – purchases you have made but not yet used
• Prepayments – something you have paid for in advance
• Other Debtors – such as VAT rebates not yet received or director’s loans

Cash in hand & at bank

Money the business has, it can be in the till, cash not yet banked, money in the bank.

Creditors falling within a year

This is money you owe others such as your trade creditors or suppliers and loan and HP payments due within the next 12 months.

Creditors falling due after a year

As above, money you owe but more long term such as bank loans.

So What Does It All Mean

It’s a snap shot at the balance sheet date of all the money your business has and is owed, less all the money you owe to others.  This end figure is the net assets of the business.