The true cost of late payments to SME's

• $19 billion is locked away from Australian businesses every year due to late payments.
• Poor cash flow is responsible for 90 percent of SME failure.
• Late invoice payment is something no business can afford to ignore.

Late invoice payment — the scourge of Australian business owners. Getting paid for the work you do is not necessarily an easy matter. Recent trade payment analysis by Dun & Bradstreet shows that just 38 per cent of business invoices are paid on time. It’s aggravating for businesses — especially SMEs Yet late payment is more than a mere vexation. This trend has far greater detrimental business impacts like:

• Impeded cash flow.
• Locked-up capital.
• Additional financial and administrative costs
• Diminished investment potential
• Hampered market competitiveness.
• Reduced confidence 

Late payment: a costly culture. Late payment is a global issue. Yet it is also a deeply ingrained part of Australia’s business culture. A 30-day payment term is generally adopted by Australian businesses. Such generous terms can in themselves create significant financial pressure for creditor businesses. Yet late payment amplifies such pressures. The average amount of days taken to settle outstanding invoices drifted from 52 to 55 days on average. For SMEs and business with low margins, frequent outlays and high turnover, such locked-up capital can have dire consequences.

One day at a time: a late payment cash and cost scenario. We’ve all heard the maxim: time is money. In the context of late payment this is profoundly true. Arrears just days old have significant cash and cost implications. For every $10 million of annual turnover, a three-day drift in an invoice due can take a $115,000 bite out of working capital ($10m /261 working days per annum). For many businesses, this means resorting to increased borrowings in order to bridge the gap. Standard business finance carries a 10 per cent interest rate. In this example, that equates to an extra $8,200 in additional interest expense, directly cutting into margins.

If debt turn decreased by eight days against the national average, the result would be a positive working capital variance of $217,000 per $10 million of annual turnover. For SMEs, this can be the difference between surviving or sinking, but also consider the opportunity cost of which could have been reinvested in highly competitive environments, this cost is particularly significant.

Big businesses bring big payment delays. Large companies make coveted clients. To SMEs they represent lucrative contracts and significant ongoing business potential. Yet statistically, large companies are often the worst culprits in late invoice payments. Recent Dunn & Bradstreet research revealed that the largest companies (500+ employees) are often the slowest payers of all businesses. Many enact an outstanding invoice drift up to 58 days on average. Such delays can compromise or even cripple SMEs and make it even harder to provide reliable supply unless SMEs concentrate their efforts on that client more intently (exposing the SME to concentration risk).

Opportunity knocked out. Every business needs liquid capital to innovate and grow. When cash is locked up in receivables this potential working capital is effectively frozen, so the financial brakes are put on innovation investment. Creditor business cannot progress with organic business growth. Instead, they face increased administrative costs associated with debt collection, like:

• Reminder letters
• Collection calls
• Receivables emails
• Human resources working on late account collection.

Poor cash flow compromises competitiveness — not to mention business survival. Australian SMEs play a key role in national innovation and economic buoyancy. Indeed, SMEs account for 96 per cent of Australian business. Yet many SMEs do not survive and 90 per cent of such failure is due to poor cash flow. This is one of the greatest costs of late payment.

Protection against the late payment ‘pandemic’ Late payment impacts look grim for business. Yet there are several effective solutions that help you bridge the gap between invoicing and receiving payment. The following options assist in freeing up your cash flow and liquidating working capital.

Proper paperwork. There is no substitute for prompt accurate invoicing. Mistakes in invoicing details contribute greatly to long payment cycles. Ensure all data matches up including purchase order numbers, quantity of units and price per unit. Always include your payment terms on each invoice too. You have much to gain from streamlining prompt invoice generation and collections procedures. Consider electronic invoicing and payment solutions to expedite your payment process through significant automation.

Invoice Discounting. Retain full control of your collections while enjoying an immediate cash injection against the value of your outstanding invoices. Invoice finance lets you access up to 80 per cent of an invoice’s value very quickly to immediately improve cash flow. So, you can capitalise on business opportunities as they arise while funding growth with liquidated capital. Once your client pays the invoice in full, your invoice finance provider will forward you the remaining balance, less a small fee.

Factoring works just like invoice finance but with an extra dimension. Outsource your accounts receivable service for greater efficiency and credit control and to free up time. Factoring providers will take care of monthly customer statements, reminder letters, reconciliations and monitoring customer payments. Focus needs to stay where is should be – on growing and managing the business.

Early settlement discounts may appear to be a good option at first glance. Yet these can be problematic. For a start, such discounts cut directly into your margins. A 5 per cent early settlement on $10 million turnover equates to $500,000 in foregone revenue.  Furthermore, savvy debtors may make early short payment on invoices. So, they qualify for the discount without settling the outstanding account in full. After all, the time and administrative costs associated with invoice adjustment or credit issuing makes addressing short-payment unviable.

Business life beyond late payment. Late payment poses significant risks to your business. Yet smart financial solutions such as invoice finance and factoring allow you to access precious working capital to fund growth and innovation. Particularly when coupled with efficient accounts and collections procedures.