Why Late Payments are Hurting Your Customers and Your Business
Lynne Darcey Quigley, Co-founder and CEO of Know-it, discusses how late payments hurt businesses and customers alike.
It is a well-known fact that small is powerful, especially when it comes to business. In the UK today, companies with between 0-49 employees make up 99% of the total number of companies currently operating in the economy.
So, it is no surprise that SMEs make up such a large proportion of the country’s total turnover (around 52%) of UK businesses, as well as a significant chunk of the supply chain.
But there is an issue that costs the economy a staggering £2.5 billion a year and cripples the backbone of the country’s hard-working SMEs – late payments.
Even if your own business is not a small to medium sized, there’s a good possibility that your customers and suppliers are. In which case, the impact late payments have on these companies can have a direct impact on you.
Surprisingly, businesses in the supply chain have become almost accustomed to being paid late with 74% of manufacturing companies experiencing regular late payments. Yet there appears to be a divide between the north of the country with London seeing overall late payments by 78% and Scotland suffering from late payments around 58% of the time.
In fact, in a report by Sage, the average time SMEs spend per year chasing late payers is 15 days. Why are these figures so stark? It may well be that there is a lack of confidence within the manufacturing sector where maintaining ‘good client relations’ often means turning a blind eye to late payments.
It still might not sound like an issue to larger organisations either, after all, big companies reduce their own risk by ensuring terms and conditions keep their cash flow stable, but when we consider that around 50,000 businesses are failing every year due to late payments, which is around 1,000 a week, then it becomes a real concern.
The knock-on effect means we are all at risk struggling to collect what we’re owed, and this late payment figure currently amounts to £61bn – an increase of 22% in the past year.
SMEs aren’t the only businesses to suffer
The problem of late payments in the UK engulfs businesses and shows no sign of slowing down, but it’s not just smaller businesses that are suffering and at risk of collapsing. Yet, when these businesses aren’t paid, they are then unable to pay their suppliers, so more significant businesses experience payment delays. The problem affects the whole supply chain.
No business ever wants to wait longer than they need to for payment, so what can companies do to solve the issue? Without a doubt, the best way to recover any overdue invoices is to act immediately. As we have seen, businesses with between 10 and 50 employees have an average of 7.5 invoices outstanding.
If this is your customer, then it is a real possibility that they have other invoices to pay as well as yours and as such being able to understand the knock-on effect of the supply chain is equally crucial.
So, businesses must get ahead and ensure they are first in the queue to get paid to help them stay afloat and in business. Enterprises large and small often fight hard to acquire their customers and build strong brands. Yet, acquiring a customer means nothing if you do not get paid for the goods or services you provide.
Planning for future cashflow
Once you have established a strategic plan to act quickly on late payments, collecting your overdue invoices will improve and maintain a healthy cash flow. Other areas of your business will start to prosper. You will be ready to invest in resources and people to help grow the business.
When you significantly reduce the amount of time you’re left waiting for overdue invoices, you will be able to concentrate on critical areas of improvement. Reducing debtor days directly lowers the level of risk your company is exposed to.
One key area which tends to be overlooked by businesses is the ability to identify bad payers. Understanding which companies are a risk to your cash flow will help minimise the risk of late payments and so the having the ability to credit report and monitor, highlight obvious red flags and alerts of any changes to your customers behaviour can be hugely important.
In the current climate, where cash is paramount, focusing on getting your cash into the bank will help you plan, which is key to recovering the economy. It will also help relieve any pressure to delve deep into personal accounts to pay bills – giving back some well-earned security.
This article was first published by digit.fyi