How SMEs can Handle Late Payments

How SMEs can Handle Late Payments

07/19/2016

Smaller companies are increasingly waiting more than 60 days for invoices to be paid; often double the amount of payment period typically stipulated on their invoices. Only recently, outsourcing giant Capita was accused of abusing its resources to short-change its smaller business partners[1]. Smaller firms that find themselves in these situations are often forced to consider alternative methods of finance, such as bank loans, to survive, or are prevented from investing in new growth opportunities. Worryingly, a recent report from the ACCA (Association of Chartered Certified Accountants) revealed that a one-month delay in payment could reduce capital expenditure by 1.2% in normal times and as much as 2.1% in a recession, leading to reduced profitability for as long as five years[2].  

Invoicing: A Time Consuming Process

Whilst recipients undoubtedly have a duty to pay invoices on time, there are ways SMEs can take greater control and help minimize payment delays. For example, when creating an invoice – which can take on different formats during its life – some businesses are still reliant on inefficient, overly manual processes. An invoice may start as an Excel spreadsheet, then can be processed onto another Excel spreadsheet for consolidation, before being turned into a pdf that needs to be printed, and finally sent to the customer. Manually typing, copying and processing each of these invoice stages is a time-consuming and costly process, opening SMEs to multiple risks such as wrong data entry or inaccuracy.

Processes that rely heavily on manual input also increase the likelihood of human error. Whilst some mistakes will not have much of an impact, entering the wrong digit, for example, will. An incorrect invoice not only reflects poorly on the business in question, but it can delay receipt of payment significantly. The debtor can either ask for a new invoice to be issued, starting the whole process from scratch, they can pay the stated amount and ask for a credit note or discount, or they can simply refuse to pay. None of these are ideal, and as businesses grow and more people become involved in the process, the potential for human error intensifies.

Tracking and Monitoring Invoices

A large number of businesses also often overlook the due diligence needed once an invoice has been sent. In fact, over half of UK SMEs do not track or monitor issued invoices3. This may seem like a complex, time-consuming task, but how are businesses supposed to follow up on late payments if they have no idea when or who invoices were sent to? It’s a dangerous way to operate and it’s their cash flow which is bearing the brunt.

Making the Move to e-Invoicing

In what is now a fast-paced business environment, SMEs cannot afford to rely on the same old, inefficient processes. Instead, they should be looking at how technology can be used to modernize these activities – and this includes invoicing. For example, electronic invoices, or e-invoices, remove the time challenges associated with paper invoicing by automatically generating tailored invoices with no need for human intervention. Furthermore, they can be stamped with an easily traceable electronic signature that not only guarantees the authenticity of the documents but also allows the sender to check they have been received, thus empowering SMEs with the knowledge of exactly when and who their invoices have been sent to.

Because of these benefits, governments globally have been introducing mandates to make electronic invoicing compulsory. Ultimately, there does need to be a culture change amongst bigger companies which are in some instances abusing their powers by paying SMEs late, however small businesses should also be doing all they can to keep their side of the invoicing process as efficient as possible. Only then will they be able to regain some control and prevent late payments.

1Capita accused of using major government contract to short-change small companies

2Ending late payment

3Opinion way survey 2014 

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