late paymentSpend control is all important to a company’s bottom line and can be the difference between a profit and a loss but all SME’s know you cannot pay your wages bill with profit. Cash, as they say, is king.

The availability of cash in a business is all about working capital management and a key element is getting your customers to pay you on time. So what is so hard about that? Surely if you do a good job, provide excellent goods and services, you’ll get paid on time. There is more to it. Getting paid on time relies on back-office processes you can control, your own billing process, and processes you can’t control, your customers ordering, receiving, invoice processing and payments process.

For example, if you have a business that turns over £1.2 million per year and your sales are an even £100,000 per month with 30-day payment terms, if everyone pays you in 30 days you will need to invest £100,000 in working capital. If everyone pays you 15 days late (45 days from invoice) you will need another £50,000 of investment. So this 15-day delay in payment requires an extra 50% investment in working capital. Further, if your business makes a net profit of 10% of sales the additional investment in working capital will take 5 months to earn. Poor working capital management has resulted in the demise of many, an otherwise strong business.

If your own processes in billing are flawed, and you bill your customers late, all that work in delivering an excellent product or service will be eroded as you will have to wait for the cash. Even if you bill on a timely basis you still may have to wait for the cash if you do not comply with your suppliers ordering, receiving and invoice processing process. So know your customer.

  • How do they establish you as an approved supplier?
  • How do they recognise that they have placed an order? A formal purchase order, an email quoting a purchase order number or just a phone call telling you to reference “Janice in accounting”?
  • How do they prove the goods or services have been delivered? What do you need to supply to help with this process?
  • Where, how and in what format do they prefer to receive supplier invoices?
  • How do they pay? BACS, cheque, do they have your bank details?
  • Most importantly who is the key contact to ensure your invoice is being processed in a timely manner?

Regardless of what you can control to ensure timely payment, late payments will still occur if your customer is either inefficient processing your invoices or managing its own working capital by delaying payments to suppliers. You may be able to address the latter by developing a relationship that facilitates on-time payment, but you’ll require a great deal of luck if you supply Tesco, for example. The former is going to cost you; customers with inefficient supplier invoice processing will be highly likely to pay you late and if you attract a lot of them you will find yourself facing a need for significant capital investment. Using my example above, if you are paid 90 days after the date of your invoice, another £200,000 will be required. This is a tripling of the investment in working capital. The quality of your customer base impacts the value of your business, a good measure of this is how quickly they pay you.

The other side of the coin is your own management of supplier invoice processing. Are you able to process supplier invoices on a timely basis and choose when you pay them (in control), or are you struggling to process invoices before their due date (out of control)? The consequences of being out of control are far greater than just the barrage of calls from suppliers asking for a payment date. It’s likely your accounts are unreliable (costs not recognised in the right period) and the cost of processing invoices is high both in terms of back-office staff and being placed on stop by suppliers which may, in turn, cause you problems fulfilling customer orders. Another unintended consequence is the poor credit rating attached to companies that pay late, which in turn can reduce the level of business you achieve as customers are less attracted to suppliers with poor credit ratings and poor cash flow however exciting their product and service offering appears to be. The value of your business is significantly impacted by how “in control” you are.

Much has been written about how important it is for large businesses to pay SME’s on time to foster a strong economy and encourage innovation however, SME’s themselves also need also to consider the impact of their own actions on both themselves and other SME’s. A good starting point is an efficient supplier invoice processing system that enables management of working capital creditors. This should, in turn, give your own customer’s confidence to do business with you due to its impact on your credit rating and control of your business.

Businesses, large or small, ignore the importance of working capital management and back office processes at their peril.