Late payments are a pain point for businesses everywhere, but the U.K. has emerged as an epicenter in the fight against ever-expanding days payable outstanding (DPO). From FinTech solutions to legislation, new efforts to combat delayed invoice payments continue to emerge – and yet the problem continues to worsen.
The most recent research from U.K. small business challenger bank Tide found that each small business is owed an average of more than $11,000 in outstanding invoices, and small business owners are spending an average of 90 minutes each day chasing down unpaid bills.
"Cash flow is crucial for SMEs, and just a few late payments can tip them into danger of becoming insolvent," stated Tide Chief Executive Oliver Prill in an interview with SmallBusiness.co.uk.
Indeed, the late payments epidemic is heightening awareness of the importance of cash flow management – but, according to Toni Dare, MD of Pulse Cashflow Finance, full understanding continues to lag, particularly among young businesses.
"I do think more education and awareness around the importance of cash flow management and its impact on the success or failure of a business is needed," Dare recently told PYMNTS. "When a business first starts, the focus is always going to be on sales and revenue. However, many businesses fail because of poor cash flow management."
The Late Payments Blame Game
Late payments are often identified as the biggest impediment to smooth cash flow. Indeed, Dare described late payments as "the most obvious barrier" to this achievement.
In the U.K., regulatory efforts to tackle late supplier payments range from naming-and-shaming large corporates that pay their suppliers to a recent bill proposal that would allow authorities to fine perpetual late-payers.
Many of these initiatives focus on the largest conglomerates that are accused of using their small suppliers as a source of free financing, stretching out payment terms to manage their own cash flows to the detriment of vendors. While corporate payers certainly have a responsibility to pay their suppliers on time, Dare noted that the suppliers themselves also have a responsibility to accelerate their accounts receivable (AR) flows.
"While the blame publicly lies at the door of the late-paying customer, there is a lot that businesses can do to try and alleviate late payments," she said.
Businesses must strike a balance between pursuing a customer's next order and ensuring that a client's past order has been paid for – a difficult achievement, Dare acknowledged, but one made possible through internal controls that promote better collections practices. The clear communication of payment terms, efficient and timely invoicing upon delivery of goods or services, and consistent follow-up are all essential to suppliers combating their own late payments challenges.
Too often, however, small suppliers can fall behind on these efforts – and, according to Dare, vendors can inadvertently encourage their own customers' late payments behavior.
"Poor internal credit control processes do not promote good practice," she said. "It demonstrates that getting paid is not high on the agenda."
Finding Balance Through Financing
Regulatory initiatives like those seen in the U.K. are an important piece of the puzzle of combating late payments. Yet they can also backfire – Dare noted, for instance, that efforts in the U.K. to encourage corporates to commit to paying on time have simply led some businesses to extend their payment terms.
In addition to suppliers implementing enhanced collections practices, Dare said businesses can also take control of their own late payments hurdles by embracing tools like invoice finance. Companies must be sure to wield such tools appropriately, however – as Dare noted, invoice financing is not an adequate solution to late payments.
"Invoice finance should not be used to compensate for the outcome of bad practices, such as late payment," she said. "This is using it improperly, and funders have a role in discouraging this activity."
Dare isn't the first to warn against the dangers of using trade financing products like invoice finance or supply chain finance to address late payments pain points. Some analysts argue that the use of invoice finance by suppliers, or buyers' adoption of supply chain finance programs, can actually encourage delayed invoice payments.
But what invoice financing can optimize, she said, is cash flow management – when used properly, the tool can unlock capital and smooth out cash flow lumps that businesses of all sizes inevitably endure.
As B2B suppliers, financial service providers and regulators continue to explore new strategies in combating late payments, awareness continues to grow of late payments' negative impact on corporate cash flow management – and on the importance for young businesses to prioritize cash flow strategies. According to Dare, data will become an increasingly important part of addressing the cash flow bottlenecks caused by late payments and other factors, like seasonality or supply chain disruptions, with initiatives like open banking introducing even more opportunities for cash flow optimization.
"These [date integration] innovations mean we can choose to make our data more accessible to firms we are interested in working with," said Dare. "In my view, it can only improve the knowledge of, and access to, a wider range of options."