Fighting back against late payment culture
There’s a fine line between being fashionably late and being disrespectfully late, in both business and pleasure. But in the business world, the line that separates what’s acceptable from what’s potentially damaging to an organisation is extremely fine.
The European Payment Report 2015 reveals that the debt Europe's businesses have to write off due to business partners failing to pay amounts to 3.1% of their total revenues; amounting to 289 billion Euros of lost money annually.
The negative effects of late payment are far reaching: an overwhelming 40 % of European businesses claimed that their customers’ inability to pay on time is hindering growth. Every third company stated that faster payments from customers would enable them to hire new employees, while every fourth company made a connection between late payments and the need to lay off staff.
The reasons behind delayed payments are manifold, but from the perspective of six out of ten businesses, debtors delay payments and make them wait for their money as part of a deliberate strategy.
A serious threat to European economic growth, the issue of late payments is finally gaining some attention now, especially with the European Commission’s (EC) Late Payment Directive to support European businesses in collecting outstanding debt being adopted by national legislators across the EU.
Strengthening the supplier’s position in enforcing on time payments, however, only addresses part of the problem. In particular, the European Payment Report 2015 identified financial difficulties, intended delays and administrative inefficiency in that order as the most common reasons for delayed bills.
A large part of the reasons behind late payments are hence rooted in inadequate internal processes rather than deliberate delays, and should be addressed accordingly. In the UK for instance, the most common reasons for late payment given by 30% of debtors was that they were waiting for payment from their own customers, while 23% said that they were waiting for payment authorisation as research by commercial debt collection agency Hilton-Baird suggests.
The EC’s Late Payment Directive is not designed to tackle administrative inefficiencies. Therefore in order to fight late payment culture, businesses should consider automating their P2P process to target internal delays and inefficient cash flow management.
More specifically, P2P automation helps businesses tackle two common causes of late bills: delays caused by administrative efficiency and gaps in the cash flow due to lack of visibility of cash flow positions. Controlling outgoing payments more tightly practically eliminates the risk of unintended late payment.
For a current and more consistent picture of each payment, three-way match technology aligns the vendor’s invoice, the purchase order and the receiving report automatically in real time. An automated P2P process also ensures visibility of upcoming payments Accounts Payable (AP) needs to be aware of. This type of set-up means that everyone in the business can tap into the status of payments ensuring that teams concerned are aware of payment timings in the long-term and outstanding authorisation of payments can be reduced dramatically.
Advanced P2P tools also enable the creation of alerts to remind AP when a bill is overdue and penalties are imminent. This kind of notification system for recurring payments contributes greatly to better awareness and efficient planning, and, most importantly, prevents any late payments.
Furthermore, if procurement departments convince suppliers to invoice them electronically, e-invoices can be an excellent way for businesses to increase accuracy and traceability. Regardless of the format, once received, the data will be synced across the whole P2P path, making it accessible by all departments involved in the payment process.
An optimised P2P solution improves communication not only across the business internally, but also with suppliers. Once payment data is synced and optimised, this information can be shared via a ‘Supplier Portal’, which automatically updates the payment status and informs suppliers of the invoice processing period. Suppliers can log into the portal and track the progress or use the platform to communicate with their business partner.
This kind of transparency and communication strengthens trust and fosters good supplier relations. Not to mention, using a platform feature like this also relieves the AP department from having to answer phone calls from frustrated suppliers asking about outstanding payments.
While the EC vowed to equip businesses with the legal weaponry to fight against late payment culture, supporting technology can provide businesses with the appropriate tools to manage cash flow internally. In light of stricter legislation in terms of acceptable periods of delay, businesses must bring their cash cycle in order to avoid penalties and further reaching repercussions of late payments. That way, late payments will soon be a thing of extreme circumstance, and not a regular bad habit.