Late payments harm SME’s

Xero recently carried out research among 517 small businesses in South Africa and revealed the impact of late payments on them. The research was carried out by Frontline Market Research, but similar results are seen in most other countries one suspects.

Almost 50% of UK SME’s are paid late according to Bacs Payment Schemes Limited. The average debt is £32,185 and totals £26.3 billion (Dec 2016). According to a 2016 multinational payment study by Dun and Bradstreet the late payment rate in the USA for 2015 was 46.2%.

The impact in South Africa is similar with more than half of the respondents saying that those late payments have a negative impact on their business. The obvious impact is on cash flow (32%) but it also leads to a loss of morale (18%) and a subsequent loss of productivity (16%)

Payment terms vary by geography and industry

The survey also revealed some regional differences in South Africa. Port Elisabeth is the worst performing with business owners spending on average 1.3 days each month chasing payment and invoices paid, on average, 10 days late. In Johannesburg things are better than the average 1.3 days with owners spending only 1.1 days a month.

The survey also revealed that some industries pay faster than others. Healthcare is the slowest with suppliers averaging 2.6 days per month spent chasing invoices. Manufacturing & Utilities, Architecture, and Engineering & Building fair little better with an average of 1.5 days each.

Major economic impact

Xero says this issue should not be swept under the carpet. It threatens South Africa’s National Development Plan which aims to create 11 million jobs by 2030. With poor cash flow due to late payments SME’s are less likely to employ new staff. Additionally, entrepreneurs cannot afford to reinvest and employ new staff if they do not have sufficient cash flow to fund that growth.

Whether government legislation is the correct thing in these circumstances is another matter. Xero shies away from speaking out about this but does indicate that there are measures that small businesses can take.

How to improve payments

Gary Turner, Managing Director of EMEA offers five tips to improve cash flow:

1. Invoice promptly: Make sure that invoices are raised promptly. It helps that the process for doing so is simple and easy.
2. Establish relationships: This is not just about a contact between the sales person and buyer. Relationships need to exist between multiple individuals within companies. Ensuring that the person responsible for finance has a relationship with their equivalent person in the supplier can make a difference.  This isn’t just about chasing payment its about building trust between the two organisations
3. Keep accurate records: Without an accurate record of the cost of delivering either goods or services, invoices are delayed. If couriers fail to deliver goods this can lead to further delays in raising an invoice. Understanding the costs of a sale and the actual amount that needs invoicing at point of delivery is important. When offering a service, the ability to track the time spent immediately and tracking expenses in real-time also helps.
4. Define your payment terms: Ensure that the initial contract lays out the payment terms required. Changing terms so that customers pay quickly, delivering terms of 2 weeks can hasten payments. There is a balance though between offering incentives to pay early and penalties for late payments.
5. Offer easy payment methods: Cloud accounting solutions allow invoices to be sent electronically by email. These invoices can include “pay now” buttons by payment systems using credit/debit cards or applications such as PayPal. Ensure that you offer the most efficient way for your customer to pay. It is worth discussing preferred payment methods up front to understand how customers prefer making payments and offer the appropriate tools for them to do so.  If payments are made via bank transfer ensure the correct details are included on the invoice, or even set up ahead of time.

Conclusion

This is an interesting survey in a single country. The results will vary across the globe but it is clear that it is a major issue. The problem for many of the payers though is that they themselves may be waiting to be paid by their customers (24%). However, some are due to a disorganised internal systems (23%), which a better relationship and understanding of payment methods can help.

The final reason is that companies set their own payment terms, regardless of supplier terms. This is frustrating for many companies especially when it is large businesses laying wielding that power. This is where government legislation might help. However, the most important thing to discuss and agree payment terms with customers, understanding and possibly helping with their challenge.