How to reduce the impact of late payment
In 2017, a slow payer ethic emerged as the biggest challenge to getting paid on time. In 2018, we found that a surprising number of financial decision makers were actively pursuing a late payment strategy in order to protect cash flow.
This year, late payment remains a challenge. What has become clear is that companies are often taking a conscious decision to pay suppliers late. Government intervention, such as the Prompt Payment Code of 2008 and the Duty to Report (DTR) regulation introduced in 2017, requiring businesses to report on payment practices, isn’t doing enough to curb this unfair business practice.
The causes of late payments are a mix of internal and external factors, including:
- Just over a third of financial decision makers (35%) are actively using late payment to protect their own liquidity and cash flow.
- Blame is often put onto suppliers with 39% citing poor quality service or incorrect invoice details (33%) as reasons for late payment.
- Additionally, 40% of financial decision makers admit their business has inefficient Accounts Payable processes which limits their ability to pay on time.
- However, 17% of cases of late payment occurred because the supplier didn’t chase the invoice.
Let’s just repeat that last point. The reason behind one in every six late payments is that the supplier didn’t chase up payment of the invoice.
Getting paid on time
Addressing a problem that appears widespread is not easy but there are some practical solutions and techniques that businesses can adopt.
Firstly, make sure that you have followed all of the customer requirements for invoicing, such as quoting a Purchase Order number if this is mandatory, and make sure you send it to the right email/postal address.
Cloud-based solutions for distributing and tracking invoices electronically give you visibility over each invoice status in real-time. This enables you to take proactive action where you can see an invoice has not been opened for example, allowing you to send automated and proactive reminders which improve the likelihood of getting paid. This starts to address the 17% of cases where an invoice isn’t chased.
Offer immediate online payment options. This can be really effective when chasing for payment if you can provide a link where the invoice can be paid immediately by credit or debit card. Accounts Payable or Credit Control teams will attest to how effective this can be.
Accounts Payable automation solutions make it easier to process and approve your own invoices more quickly. Efficient and timely invoice approval creates opportunities for businesses to partner with finance providers to put in place early payment programs.
Such collaboration mean that payers can meet their own objective of not paying away hard-earned cash too early and minimising the use of overdraft facilities, while at the same time, helping their suppliers to improve their inbound cash flow and get paid more quickly.
Developing strong commercial supplier relationships could become a competitive advantage. In fact previous Business Payments Barometer respondents cited collaborative relationships with customers (2017) and suppliers (2018) as the reason for getting paid on time. It places good payers in a better position to negotiate contracts with trading partners and create relationships that allow for more accurate cash forecasting on both sides.
Building a prompt payment culture
We should all aim to build a culture of better payment practice in our organisations by supporting faster settlement of invoices. And by using the approaches outlined above, you can start to address the most common reasons why companies are not paying on time.
If you would like to learn more about the research, the Bottomline 2019 Business Payment Barometer report is available here.