Why Are Payments Late?

Picture this. You’ve made an agreement with a customer. You’ve established what they want from you and how much it will cost, and you’ve delivered the goods or services. The customer is happy, but the transaction isn’t over yet. Because you still need to be paid. Sure, you’ve sent the invoice (with the agreed 30 day payment terms), but the due date has been and gone, and the payment has still yet to arrive. It’s frustrating, but unfortunately, it’s also probably familiar. It’s something that happens a lot, particularly to SME’s. But why is that? And by understanding why late payments happen, could we prevent them in the future?

Cash is King

If you’ve been reading our blogs for a while, you will know that cash flow is vital to small businesses. Cash is King, Queen and Duke, and it’s the lifeblood of every business. Which means that when the supply line is blocked (say, by late payments), it can cause a heart attack. At best, a disruption in cash flow can be annoying, and at worst it can be a serious threat to the businesses survival.

Research by the Federation of Small Businesses (FSB) has shown that small businesses are owed, on average, around £6,142, and mostly by bigger businesses rather than other small firms. It also showed that if these payments were made, or made on time, it would prevent the collapse of over 50,000 businesses each year. Yes, you read that right – 50,000 businesses a year are forced to close their doors because of cash flow problems caused by late payments.

Why Are Payments Late?

So then the big questions is – why are payments late in the first place? If we look at the research again, BACS software provider Bottomline has shown that 92% of financial decisions makers admit to having paid their suppliers late intentionally. This figure is sad in itself, but it’s made worse by the fact that only 8% of businesses claim they always pay their invoices on time.

Part of this is because late payment culture has somehow become acceptable, and this has removed a lot of the stigma from paying late. After all, it’s normal, everyone does it, so why should we feel bad about it? But a bigger part of it is because financial decision makers have actually started actively delaying payments as part of their cash flow management strategy, and have done for a while. So much so that in 2008 and 2017, the Government intervened and brought in the Prompt Payment Code (2008) and the Duty to Report (DTR, 2017), both designed to incentivise businesses to pay on time, and to be transparent in their payment practices.

That research we spoke about also revealed some of the biggest reasons given by businesses for not paying on time. You might think it would vary from company to company, but there are some reasons that crop up time and time again, including:

• Just over 35% of financial decision makers actively use late payment as a way to protect their own cash flow.
• Blame is often placed on suppliers for late payments – with 39% citing poor quality service, and 33% citing incorrect invoice details as the reason for late payment.
• 40% of financial decision makers admit that their business doesn’t have an efficient accounts payable process to handle payments, which limited their ability to pay on time.
• 17% of businesses paid late because the supplier didn’t chase the invoice.

So What Can You Do?

Now that you know why your customers often pay you late, you might feel a little annoyed. After all, many of those reasons are out of your control. But it’s not all doom and gloom – there are some things you can do to improve your chances of being paid. Things like:

• Chase your invoices: We’re going to say it again – 17% of customers didn’t bother paying invoices on time because the supplier didn’t chase them. So the biggest change you can make it to chase your invoices. Set up auto-reminders in your accounting software, and make sure overdue invoices are chased the day they become overdue, and regularly after that.

• Charge late payment fees: It’s often not enough to have late payment fees as part of your T&Cs, you need to implement it as well. Make sure the customer knows that if they pay late, they will be subject to late payment fees, and then ACTUALLY CHARGE THEM. This is a way of recouping some of the costs of chasing the payment, and may make them think twice about paying late in the future.

• Practice what you preach: To end the late payment culture will take effort from all of us, so as well as chasing payments, make sure you are paying your invoices on time as well. It might take a while, but if everyone makes the effort, then we are more likely to succeed.

At Debtcol, we specialise in helping business owners reclaim payments that are overdue, or bad debts that need paying. If you would like more information about collecting debts, please just get in touch with us today.