Amid economic turmoil, including a rise in corporation tax for 2023, late payments are on the rise significantly impacting business survivability. According to an FSB study, one in three business owners had an increase in late payments of invoices over the last year.
Late payments can be the result of complex payment approval processes and cash flow mismanagement. With current state of the global economy, mitigating insolvency remains a challenging task for business owners.
What leads to late payments?
Several causes of late payments can be identified in the payment process. Firstly, the complexity of the payment approval remains a contributing factor. 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. The need to streamline payments through an organised and systematic approval is key. Next, late payments can result from time-consuming manual processes that become barriers to paying on time. Inefficiently streamlining invoices or relying too heavily on manual processes increases the potential for late payments.
Late payments lead to business fragility
Interest and debt recovery costs are two of the greatest consequences of late payments. The cost of interest on late payments (Statutory Interest) within the UK is 8% of the owed amount plus the Bank of England base rate for business-to-business transactions. This base rate increased between the 31st of December 2021 and the 22nd of September 2022, increasing from 0.25% to 2.25%. Rising interest makes it even more difficult for businesses to pay invoices on time. Moreover, businesses must also pay penalties for late payments. Essentially, the longer the interest accrues, the higher the overall debt businesses owe.
For businesses trapped under the late payments cycle, reputations are negatively impacted – affecting supplier-buyer relationships in the industry and beyond. Given poor supplier relationships, the delivery of promised products and services may be delayed, resulting in businesses losing their competitive advantage or worse, their customers.
Business survival depends on improving supplier relationships. 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. Businesses gain a competitive edge when they deliver consistent quality to their customers. Consistent quality improves bottom-line profitability.
Solution to breaking the late payments cycle
One of the ways businesses can escape the late payments cycle is by harnessing digital accounting tools to ensure their suppliers are paid on time and mitigate complex approval systems.
Digital accounting tools allow business owners to schedule payments, alleviating the risk of accidentally missing a payment. 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. They also let businesses employ a proactive approach by making payments in bulk, creating another line of defence that prevents the late payments cycle. Subsequently, these preventative and proactive measures made possible by digital accounting tools maintain quality supplier-buyer relationships.
Business viability is threatened by late payments. Fortunately, streamlining business finances through digital accounting tools can reduce late payments and enable businesses to stay compliant and resilient to changing business needs.
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- Source: https://www.finextra.com/blogposting/23303/breaking-the-late-payments-cycle?utm_medium=rssfinextra&utm_source=finextrablogs
