As every financial decision maker will tell you, getting customer invoices paid on time is the first step to optimising working capital – the lifeblood for every business. Slow payers can reduce the number of decision making options open to a business, putting pressure on survival, growth or customer relationships. The real question is: ‘What is the best approach to tackling such issues?’
We recently conducted a survey of the UK payments landscape to understand the key trends that are impacting financial decision makers. Sadly, the ‘UK Business Payments Barometer 2017: Payments for a New Economy’ report found 45 percent of small to medium sized enterprises (SMEs) cited slow payer ethic as their single greatest challenge to getting their invoices paid on time.
This is despite specific initiatives set up to tackle the problem. First was the UK Prompt Payment Code, which Bottomline fully supports and follows themselves. This was founded by the Chartered Institute of Credit Management together with the UK government.
Second is the ‘Duty to Report’ legislation which came into force in April of this year. The aim is to curb the slow payer problem in response to the £44.5 billion overdue payments owed to SMEs, often by large businesses. Under the new rules, large businesses and limited liability partnerships (LLP) are obliged to publish information about their payment practices and performance twice a year on a government services database. Non-compliance is a criminal offence for which both the company and its directors will be liable to an unlimited fine on conviction.
For many financial decision makers, handling slow payers has become an accepted frustration of doing business – an accepted practice that just became the norm. For years, businesses have been so slow getting their act together, to the point where government had to intervene and legislate in an attempt to tackle the problem. It remains to be seen whether the threat of publicly naming and shaming bad and late payers will have an impact on this ethic.
In the meantime, by understanding some of the underlying factors leading to late payments and the approaches that are proving to have the most success, I believe there are a lot of useful steps businesses of any size can take.
Growing businesses face different challenges
When it comes to the reasons for late payments, businesses face different challenges at each stage of growth. Large businesses, the next category up from SMEs, called out invoice dispute as the main reason for their customers not settling their invoices on time. Meanwhile corporates – categorised as companies that employ between 1,000 to 10,000 people – also suffered from slow payer ethic as their main cause for late payments.
When it comes to the largest business category, the biggest challenge for enterprises is matching payments that have already been received with customers’ accounts. This reflects the sheer level of complexity in having true visibility of financial documents, processes and payment data.
Fast-growing businesses often outgrow their internal account processes and, as a result, create a snowball of complexity to compensate process gaps. In our experience, businesses that are most successful at tackling this challenge, implement scalable processes, and technology automation right from the beginning.
Collaborative customer relationships are proving more effective than debt collection
If slow payer ethic is a significant cause of SME invoices not being paid on time, then what is the secret to breaking this habit and getting paid on time?
Our report revealed that the best approach for ensuring invoices are being paid successfully on time was having collaborative customer relationships –almost half of all businesses surveyed rated this as the most effective method.
Part of this is having an easy way for customers to connect to a call centre or shared portal of information. This encourages a more open dialogue to discuss a debt or to organise payment plans – as opposed to ignoring invoices and delaying payments.
We often forget that an efficient account operation also helps reinforce good customer relationships. If an invoice isn’t delivered to the right individual and the customer has unwittingly not paid, a knock-on impact is that the supplier may cut off access to their product or service. This is relevant upstream as well with a business’ own suppliers and the ripple effect damages the whole service intended.
We see this as a real shift away from traditional debt collection – which is the second most popular approach at 31 per cent. Considering the anticipated growth of the supply chain finance market, it was surprising to see this as one of the least popular approaches (19 per cent).
For enterprise-sized businesses, eInvoicing and document traceability were cited as the most effective method of receiving payments on time. This reflects the high volumes of invoices such companies must manage, as well as inherent complexity behind their accounts functions.
This works both ways as very often the same systems will be used for accounts receivables as those for managing accounts payables. Ensuring that you are properly on-boarded on any e-Invoicing systems and processes is an important step to ensuring your invoices are paid on time.
There is no place to hide for slow payers
When companies start a trading relationship, they do not expect negotiations to continue right through to individual invoices being paid on time. It is not acceptable that almost half of our SMEs – the lifeblood of our economy – are suffering from the slow payer ethic. The now-in-force Duty to Report legislation is a wake-up call to every business. Not only is there an onus to ensure payments are promptly made to good-faith suppliers within agreed timescales, but also a reminder to businesses that they have the right to payment without undue delay. In an increasingly digital world, slow payers can no longer hide behind size, process and complexity.
With the new legislation in place, we can expect greater adoption of modern payment technology – an effective way in which businesses can introduce greater visibility on cashflows and facilitate effective dialogue between customers and suppliers to quickly and proactively solve payment issues.
Ed Adshead-Grant is general manager of payments at Bottomline Technologies.
Further reading on slow payers
