late payments

The Real Cost of Late Payments

We can all agree I’m sure that getting paid late is frustrating. Why then do we often take so long to do anything about it?

In our blog Is the Credit Control Call Dead? we looked at some of the reasons why we may not be as effective in chasing for payments as we could be. Here we look at what that delay could actually be costing your business.

According to a BACS survey, late payment is costing smaller businesses more than £2 billion a year. And that’s only the costs you can measure in monetary terms. Yet intangible costs have a negative effect too.

Time

The survey by BACS found that thirty-nine per cent of companies are spending up to four hours a week chasing late payers. What could you be doing with that time instead?

Alternative Funding

The most obvious cost to a business is the cost of finding alternative funding. Payroll, rent, supplies and other operational expenses do not stop to wait for customer payment. There is a cost to using other sources of cash. Whether banker, a private lender, personal resources, or delaying payment to your suppliers – there’s a cost involved.

BACS found that a quarter (25%) of businesses facing late payments had to rely on bank overdrafts to make essential payments. While 28% of company directors reduced their own salaries to keep essential working capital inside their businesses.

Passing the Late Payment on to your Suppliers

The BACS survey revealed that almost a third (32%) of businesses facing late payment said overdue invoice settlement forces them to pay their own suppliers late.

Reputational Damage

Late payment is often seen as a sign that the buyer is in difficulties. If you create this impression with your suppliers you may find that their terms worsen next time you try to place an order.

Late Payment Charges

Aside from statutory remedies for charging interest on late payment some of your contracts may include extra administration charges for handling of:

• Late payments
• Bounced cheques
• Failed direct debit collection

Poor Credit Score

Paying your suppliers late will have a negative effect on your credit score. This in turn will make it harder for you to secure alternative funding and other suppliers.

For more detail about the implications of paying your suppliers late read our blog, Why you should pay your invoices on time.

Mental Health

It can be discouraging, frustrating and divisive when payment is slow. A survey by The Prompt Payment Directory found that over a quarter (29%) of UK SME owners struggled with depression, anxiety, increased stress and other serious mental health related issues caused by the worry of late payments.

On a regular basis, more than a third (34%) lost sleep over poor cash flow caused by clients paying late. and 7% even claim to have lost their hair because of the anxiety. Worse, almost a fifth of SME owners said that poor cash flow from late payments put significant pressure on their marriage/relationship (12%) or caused it to fail (6%).

Business Failure

The ultimate cost to a business – shutting up shop!

A 2016 survey of the insolvency profession by trade body R3 revealed that late payment for goods or services was a primary or major cause of 23% of insolvencies in the prior 12 months. Furthermore, the failure of a supplier or customer was the primary or major factor in 20% of cases.

While 2018 may see the latter become the predominant reason for failure following the collapse of Carillion, late payment remains a significant factor in the survival of a business.

BACS reported that almost one in five (19%) of SMEs affected by overdue settlement admitted that a debt to them of between £20,000 and £50,000 would be enough to drive them into insolvency. A cause for concern is that 7% of businesses say they’re in that danger zone now.

Not feeling the pinch?

You may think none of this applies to you – there’s always enough money in the bank account to pay the wages and the bills. Yet, the following costs still apply as long as you have invoices that are overdue for payment.

Administrative Costs

The administrative burden of debt recovery involves staff time, internal tracking systems, postage and phone expenses. Not to mention legal expenses if it gets that far. There tends not to be separate tracking for such things – so often they’re lost in overall admin expenses.

Reduced Sales Value

The longer a debt is outstanding the harder it gets to recover. With administration costs surrounding an old debt increasing, it’s tempting to do a deal to get some payment in. I get the rationale ‘something is better than nothing’. But write-offs mean unrecovered costs and lost profits.

Planning and Cash Flow Forecasting

If you can’t rely on the invoice due date to indicate when you’re going to get paid how can you create a cash flow forecast? And without a cash flow forecast how can you make plans for the future of your business?

Additionally with slow paying customers, you’ll need to plan to keep a portion of your cash set aside on the off chance. You may or may not have to use additional resources to recover payment – all of which cuts into profitability.

Lost Opportunities

When your money is in your customers bank account you can’t use it. You could use that money to support new sales, employ new staff, buy new equipment, or give yourself a dividend. But it can’t do any of that if it’s not in your bank account.

We’ve heard stories of businesses looking for loans to grow their business when the money they need is sitting in their debtors’ ledger. They simply have to collect it in. They won’t chase for the money for fear of upsetting customers but are happy to incur the extra costs of a loan!

Competitive Disadvantage

Several things will make it harder for you to compete for market share or even to maintain your existing share. They include:

• The inability to take opportunities as they present themselves
• Reputational damage caused by late payment to your suppliers
• A poor credit score

The moral of the story? Don’t leave credit control to chance. You need to work at it. And, even if you’re not experiencing cash flow problems, there are improvements you can make to benefit your businesses future.

If you’d like to explore how to reduce the cost of late payment to your business call Nicki on 07900 834802.

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