Late payment – how businesses can avoid the cash flow hole.
This article was written by Nick Ogden, founder of CashFlows, a provider of business payment solutions. CashFlows was founded in 2003.
Once again late payments are making the headlines. As politicians and journalists come forward to identify small and growing businesses as an integral factor in rebuilding the UK’s economy, it is unsurprising that the issues of late payments and cash flow have been brought to the fore.
The problem of late payments
Late payments are so ingrained in UK business culture that we now readily seem to accept them as a challenge of the job. Recent research from the credit agency Experian shows that businesses with more than 500 staff admitted to settling their bills an average of 31.5 days later than their agreed terms, in the first three months of 2012. Our country’s smallest companies - those with less than five employees – are facing the same problems, with bills being settled on average 21 days later than agreed.
Yet, for as long as payments are coming in, regardless of whether this occurs in a timely fashion or not, most businesses will be happy to continue the working relationship. Furthermore, for many, especially growing businesses for whom there will never be enough hours in the day, the arduous task of checking who has or has not paid their bills is likely to continuously fall to the bottom of the ‘to do list’.
Further recent findings, this time from Hilton-Baird Collection Services’ Late Payment Survey, prove exactly this point. Only 47 percent of the respondents actively credit checked new customers in the second half of 2011 and just 30 percent credit checked existing customers. At a time when everyone’s budgets are being squeezed and businesses are battling it out in difficult market conditions, monitoring and managing incoming payments are more important than ever. Yet, by failing to undertake credit checks and basic bank account management, businesses put themselves at risk of late payments and the resultant cash flow hole. For small businesses this can result in defaults on outgoing payments, or in the worst case scenario, even folding entirely.
This problem impacts on all businesses but can be particularly troublesome to small and growing businesses. Take the Experian results. Small businesses receive payments on average 21 days later than originally agreed. Although this is considerably less than big businesses, which wait an average of 31.5 days, larger companies have greater capital to absorb these cash flow disparities.
On the other hand, for smaller and growing businesses, delays in payments can cause a number of domino-effect problems. For one thing, it makes it near-impossible to plan outgoing payments. How can a business settle its own bills, with no view of when it will next receive an incoming payment?
This chain of bad payments then impacts all other business relationships. The Forum for Private Business, with Graydon, the credit insurer, recently released survey results highlighting this domino effect of late payments. Of the survey respondents, half of those not paid on time had then delayed payments to their own suppliers. This clearly illustrates the bad cycle of late payments, which then impacts everyone in the UK business ecosystem.
How to deal with late payments
It’s easy for businesses to lick their wounds and claim that it is impossible to enforce timely payments. It certainly is a challenge, but there are tools available to business owners looking to combat, if not the cause of late payments, at least the symptoms.
Simply taking an active interest in the movements of your business’s finances is the first step. For one thing, account management will help a business identify any persistently late payments. If a client is persistently late with payment, it is worth considering that this may be an indication of greater problems. A financial agreement with a struggling company or client creates unstable ground and businesses need to tread carefully. Having visibility of payment movements will alert you to potential issues and allow you to take appropriate action.
E-invoicing solutions – the exchange of the invoice document between a supplier and a buyer in an electronic format – are just one tool available to businesses to improve visibility of cash flow. Working with electronic invoices has a number of advantages. Firstly, it is instant and you have peace of mind that the customer will have received the invoice. Rather than working off paper invoices which need manual entering into, dare I say, spreadsheets, when invoices are inputted into accounts systems automatically, your business will have clearer visibility of current and forecasted cash flow. Optimising your business’s working capital is an important financial management technique adopted by businesses as they mature – this allows them to rely less on external financing and maximise the capital in their supply chain.
E-invoicing also removes the time-heavy undertaking of filing and following-up – records are automatically kept up-to-date and it is clear to see who has and has not yet paid. Electronic account reconciliation provides instant and accurate payment visibility, resulting in far stronger credit control, allowing businesses to identify and plug any potential cash flow holes. Paying your own business’s bills electronically will enable you to take advantage of any early discount schemes too. And of course, we can’t forget the trees – e-Invoicing is far better for the environment. Europe sends over 30 billion invoices each year, so switching to e-Invoicing will promote a more sustainable message for your business.
Businesses need to take it upon themselves to open up organic cash flow, but the Government can also play a role in tackling the late payment culture impacting on UK businesses. The All-Party Parliamentary Small Business Group recently released a paper calling for all companies supplying to the public sector to sign up to a ‘Prompt Payment Code’. This is just one way in which Government can help and is certainly a step in the right direction.
Late payments are a fact of business life. People will always avoid parting with their money for as long as possible. Yet the fallout from late payments need not dog your business. Account and invoice visibility will allow businesses to spot the warning signs and act to avoid the imminent block to their cash flow. Although there certainly is a role for the Government in tackling the cause of late payments, preparation is the key to unlocking your business’s organic cash flow and ensuring that your business is fully maximising its working capital. Make sure your business is not part of late payment game of dominos.
For more information on how to deal with late payments, click here.
