The health and social care sector has undoubtedly suffered more than most over the last few years with staff shortages, increasing costs and of course the effects of COVID all taking their toll and damaging cash flow.
The problem for care providers is that in times of uncertainty, payment failure rates can increase which increases the pressure and makes running a sustainable business that much harder.
So if you start to see increasing payment failures what are the likely knock-on effects?
In this post, we wanted to look at some of the potential issues that this can cause and hopefully give you a way to reduce your payment failure rates.
The first port of call is to understand what a payment failure actually is.
What we’re talking about here is payments from clients and customers rather than local authority funding. After all, that’s another subject entirely!
Typically we’ll see charges or contributions to care costs being paid by family members of the cared-for or indeed the person themselves and this can be in a variety of ways.
Often they will pay by bank transfer or perhaps debit card payment. For older people, cheques are still a thing and many of you will still be receiving a weekly or monthly piece of paper that you have to deal with.
There are many reasons why a payment may fail.
The most obvious is that people just forget. They receive their invoice, put it to one side with the full intention of making the payment but it just never gets done.
Sometimes, where family members make the payment on behalf of say, a resident, they just get too busy and again the payment isn’t made.
It is also possible that the person paying the bill is one of life’s procrastinators. We all know someone who puts things off again and again. Who can find interesting and engaging things to do instead of dealing with what appears to be a simple admin matter. They don’t mean to do it but...
For some people, the act of making the payment is a cause of stress and upset and so they can’t manage it and we do have to be respectful of their mental health in this instance.
And sometimes the money simply isn’t in the account because it hasn’t been transferred yet.
In the care setting, it is rare that people refuse to pay because of a dispute, but just because it is rare, it doesn’t mean we shouldn’t take notice of course.
But at the end of the day, all of these issues result in the same outcome - the money doesn’t arrive in the care provider’s bank account when it should do.
The first effect of missed payments is that they cause funding gaps.
Think of it this way; the care provider has to pay out for food, heat and light, rent, staffing, administration, consumables and any number of things that they need to provide the care. Typically this will be done as they go along.
But the payment doesn’t arrive for say, 30 days after the end of the month. This means that the care provider has to fund not only the initial month’s care but they also have to spend another month paying out for things with no income.
Now it is possible that the organisation is funded well enough that they can stand this for one or two customers but when more people pay late it can produce a large funding gap that the care provider then has to fill, usually at a heavy cost.
So where a funding gap exists, the business needs to find cash to make up the temporary shortfall.
Going overdrawn at the bank without notice will incur ridiculously expensive charges so it is sensible to make provisions.
Often this will be in the form of an overdraft or loan from the bank which of course means extra charges for agreeing to the facility and then interest on the overdrawn amount.
Some businesses bring in extra funding from non-bank sources, but this is usually at a higher rate of interest.
Alternatively, it is possible to use a factoring company that will advance a percentage of the value of the invoice when it is raised but again this is at a cost and they will only pay out 70-80% of the value.
So whilst it may seem the right thing to do to give your customers leeway when it comes time to settle their account, you can see that there is a cost involved with that.
Another hidden cost of late and failed payments is the increase in administration.
It shouldn’t be underestimated how much time is spent chasing payments from people.
Often, administrators have to spot that the payment has failed, investigate whether it has been made in a different way, send out a reminder, deal with query calls and maybe even offer an alternative way to pay.
Nobody likes credit control even if in many cases it is simply a case of sending out copy invoices, statements or reminder letters so anything that can reduce the burden is a plus.
In smaller organisations, time spent working on the unproductive aspect of administering payments could be much better spent on more positive aspects of the business.
As if we didn’t have enough uncertainty in our lives, failed payments simply add more into the mix.
If you don’t know what your cash flow is going to look like then how can you plan?
Our aim should be to reduce uncertainty and one way of doing that is to clamp down on failed payments. Having certainty over when you will receive your payments and how much they will be is the first step to having an accurate and reliable cash flow forecast.
We’ve put this last in our list but really it probably should be right at the top.
The fact is that failed payments add to the stress levels that everybody is experiencing.
Missing a payment can distress the customer, often at a time when they really don’t need to be upset.
Having to carry out credit control duties stresses the office employee who has better things to do and really doesn’t like calling people and asking for money.
And uncertainty over cash flow stresses the business owner who is always wondering if they will have the funds to make payroll or pay their rent.
So don’t underestimate this. Failed payments can really ruin people’s day.
That’s all well and good but how do you reduce failed payments in a practical sense?
The first thing we would say is that it is important to have clear and consistent payment guidelines. If you don’t tell your customer when you expect them to pay then you can’t be surprised when they end up paying late.
Secondly, think about communication. Explain to your customers why it is important that they pay on time, every time. Link their invoice payment to the wages of the person who actually provides their care and show them that late payments can cause problems.
Also, make sure you have a consistent credit control process. If you expect to be paid on day 7 and the payment fails, then send out your reminder on day 8. Don’t delay, because debtors can often see that as a sign you are not bothered.
Make sure you have convenient ways for people to pay. We are all different and admittedly older people may not be so keen to pay using their phone! But having things like an easy way to accept direct debit payments means that the customer can set up their payments process and forget about it.
One of the things that we’ve seen is that care homes that sign their customers up to a direct debit process have fewer failed payments but that’s not all. They also spend less on administration and have much more certainty about their income and cash flow.
Accepting payment by direct debit means that customers don’t have to remember to pay and gets around the issue of procrastination. It’s also handy because the business can vary the payment depending upon the services provided from one month to the next without constantly having to ask for re-authorisation from clients.
And our final and most important tip - make sure you have a cash flow mindset. Make cash flow your number one priority as a business without cash is always going to be in trouble.
We’ve seen then that failed payments can cause a multitude of problems for the care sector and business owners need to be aware of the issues involved.
Failed payments can cause a serious funding gap that costs money to bridge and they take up time and effort in management and admin.
They are stressful for everyone involved and yet in many ways, they are simple to avoid (or at least reduce).
If you’d like to reduce your failed payments and spend less admin time, then Direct debits is the way to go. Contact us now and let us show you how we can help.