Running a business can be challenging enough, but for many, there is also the added challenge of late payments and the huge issues that come with it. According to our recent survey, 17 per cent of all payments in the UK are late and nine per cent are eventually written off as bad debt. For manufacturers, late payments are a major issue. Another survey suggests that, on average, SME manufacturers are owed £83,000 – the worst affected of all business sectors.
Chasing payments is one of the greatest barriers to productivity and growth for many manufacturers. It is more than a minor inconvenience and could make or break a business. In chasing late payments, businesses are wasting time that could otherwise be invested in improving their process and products. On average, UK SMEs spent 15 days per year chasing late payments
The UK also has the highest overall proportion of late payments – with 18 per cent of invoices paid late. 40 per cent of UK SMEs also said that they saw a direct, negative impact to their business from late payments – ranging from reducing future investments, to cutting staff pay, to being unable to pay bonuses. On top of this, there is also the risk that they won’t be able to pay their suppliers, setting off a domino effect across the spectrum of business partners.
A culture shift
Something needs to change. Late payments shouldn’t be the norm and should be entirely unacceptable. When asked what their top barrier was to chasing late payments, 40 per cent of UK businesses said to “protect client relationships”. As understandable as this is, it is not a sustainable position.
Manufacturers, and other businesses alike, need to be emboldened to confidently chase late payments. Otherwise, they will be putting their profitability at risk and possibly endangering their businesses. Not only would this proposed culture shift help manufacturers become more efficient, it will also enable them to focus on, adding value to customer experience, rather than chasing outstanding payments.
Once you’ve established a process, stick to it
One of the most common reasons given for late payments is that the transaction is pending. Suggesting that the payment has not been prioritised as it should. With the right emphasis, a lot of improvements could be made on the late payments issue if businesses tighten their terms of service from the beginning of the conversation.
Most people are likely to pay faster if they are told it is a requirement for service. It puts a sense of urgency that makes the process more efficient and it also helps with managing the customer’s expectations and gives them time to schedule their payment in advance.
Don’t chase. Automate
In most cases, the administrative process of making payments is what puts many prospective payers off. When the process is simplified, you won’t have to ask twice. Automatic and digital payment methods, such as direct debit and e-invoicing, can make payments as simple as one click for your customers and virtually eliminate the top obstacles to getting paid on time. No need for awkward conversations, strained client relationships or dedicated staff to give chase because the payment is reconciled into your account once the customer initiates the transaction. No need to track transactions to see if they’ve cleared.
Digital payments that are reconciled in your bank account can also give manufacturers more visibility and control of their cash flow. As these types of payments are more reliable, this will help manufacturers get a better understanding of the funds available to the business, giving management to the ability to adjust as needed.
There is no reason for late payments to still be a scourge on businesses in today’s world. We must work together to erase this habit, as well as every other avoidable obstacles that affects business growth.
Also, the UK government has big ambitions for its industrial strategy, with the desire to place the UK at the forefront of global innovation and technical advancement. This however, can only happen if manufacturers are able to invest in people and processes – only possible if there is a reliable cashflow. If payments are missed and manufacturers are unable to make these investments, it could easily derail the strategy and put the wider economy in jeopardy.
As of the time this article was written, £143,721,534,892 has been lost to needless administrative tasks such as chasing late payments in 2018 alone. That is £13,780 per second and a total of 6 days and 51 minutes. Needless to say that this is a lot of wastage – money and time that can be put back into the economy and businesses to help them grow.
Alan Laing, is the Managing Director of UK and Ireland at Sage.