Amid economic turmoil following the UK Chancellor’s Autumn Statement, late payments are on the rise, significantly impacting business survivability.
Late payments not only have the potential to disrupt the equilibrium of a business, exacerbating profitability and cash flow management issues, but they also make it more difficult to retain staff by bridging the gap between cost-of-living standards and remuneration.
The UK economy has resulted in one of the most significant declines in living standards since record began, putting a huge strain on SMEs. According to an FSB study, one in three business owners had an increase in late payments of invoices just last year, with another report finding that UK SMEs are spending upwards of one working week pursuing late payments. Interest rates, base rates and late payment fees all serve to exacerbate late payments but can also be the result of complex payment approval processes and cash flow mismanagement. In the current economic climate, keeping people employed and mitigating insolvency remains a challenging task for business owners.
The root cause of late payments
There are a multitude of ways the payment process architecture causes late payments, such as complexity within the payment approval process. For example, those who work within SMEs can be responsible for various operations and might not all have access to the business’s finances and consequently are not able to pay the supplier. This reinforces the need for an organised and systemic approval system that can streamline payments. In additional, manual processes, such as inefficiently streamlining invoices or too much of a reliance on these processes, become time-consuming and increase the potential for late payments.
Late payments lead to business fragility
As interest rates continue to rise, the Bank of England recently hiked the base interest rate to 3%, the largest increase in 30 years, it becomes harder for businesses to break the late payments cycle. For business-to-business transactions, businesses must pay the cost of interest on late payments (Statutory Interest), which within the UK is 8% of the owed amount, plus the Bank of England base rate. As interest rates get higher, it makes it even more difficult for businesses to pay invoices on time. Essentially, the longer the interest accrues, the higher the overall debt businesses owe, compounded by businesses having to also pay penalties for late payments.
Reputations can be negatively impacted, affecting supplier-buyer relationships in the industry and beyond, by the late payments cycle. In turn, poor supplier relationships can cause delay in the delivery of promised products and services, resulting in businesses losing their competitive advantage or worse, their customers.
Supplier relationships are integral to business survival. Additional perks such as preferential rates, premier access to new products, and exclusive or limited supplier offers are contingent on a good supplier/buyer relationship. This helps businesses deliver consistent quality to their customers and therefore gain a competitive edge. Consistent quality improves bottom-line profitability.
How digital tools defend against late payments
There is a solution to this late payment cycle – harnessing digital accounting tools to ensure their suppliers are paid on time and mitigate a complex approval system. These tools both allow payments to be scheduled and allow businesses to employ a proactive approach by making payments in bulk, two lines of defence that alleviate the risk of accidentally missing a payment. In addition, specific functions such as workflow approval, supplier/buyer management, cash flow monitoring, and invoice collection save businesses time when managing their finances and allow for visibility of all transactions. Subsequently, these preventative and proactive measures made possible by digital accounting tools maintain quality supplier-buyer relationships.
Late payments threaten business survivability. Fortunately, streamlining business finances through digital accounting tools can reduce late payments and enable businesses to stay compliant and resilient to changing business needs. By adopting digital tools to improve cash flow management and profitability, businesses can stay competitive to be able to retain the best talent.
By Glen Foster, Managing Director UK and Northern Europe, Libeo
