Taking Action to Tackle late Payment

In the last month, the UK’s medium and large businesses should have submitted information on their payment policies, practices and performance to the Department for Business, Energy & Industrial Strategy (BEIS). The regulations are aimed to boost transparency of payment practices and reduce late payment to SMEs.

BEIS will pursue criminal legal action against the companies and their directors, if firms fail to provide updates on their conduct twice a year. If convicted of a criminal offence in magistrates’ courts, directors and companies will be fined.

It is important that the Government keeps the issue of late payment high on its agenda because it has a crippling impact on the nation’s SMEs. Around 40 per cent of British businesses have received a late payment in the last month, resulting in them taking radical action to protect cash flow such as making redundancies, stopping planned investments, being unable to pay salaries and reducing innovation spend. Our own research supports this, having found that a quarter of UK SMEs are at risk of insolvency as a result of late payments.

While the Government’s approach may cause some firms to improve their payment practices, our research has revealed there are a myriad of reasons why businesses don’t pay on time and it can be more complex than to assume intent. Tungsten Network’s Friction Index research, carried out in conjunction with the Institute of Finance and Management (IOFM) to explore the sources of friction in the supply chain, found that the main reasons for late payment run contrary to many people’s expectations.

Outdated payment process

Nearly two thirds (64%) of businesses surveyed cited slow internal processes as the biggest obstacle to timely payment; 39 per cent lack of automation; 27 per cent administrative errors; 20 per cent team capacity to manage the volume and just 16 per cent said they delay payment to manage cash flow.

Almost half (47%) of businesses admitted that at least one in 10 payments to their suppliers are made after their agreed payment terms. Only five per cent said they always pay their suppliers in the time promised and one in 12 said they fail to monitor their payment practices altogether.

This research helps us get to the heart of the matter. It is not necessarily wilful sluggishness on the part of buyers that causes late payment, rather much of the issue seems to stem from the way Accounts Payable departments manage the payment process.

There is a common misconception that late payment is always down to working capital issues or to businesses holding on to their funds for as long as possible. While this can be the case, our research shows that more often than not it is clunky internal processes and slow paper-based systems where invoices are manually processed and too often reworked from department to department, which are the predominant causes. All this leads to friction in the supply chain which damages business productivity.

Chasing payments has long been a frustration for suppliers and buyers alike and it often poisons good working relationships in the supply chain. Businesses need to get paid for the work they do and struggling to get access to funds causes unnecessary headaches.

For buyers, arranging invoice payments can be a complex task, particularly if they’re cross-border and involve ensuring compliance with local tax laws. It is unsurprising that such involved processes often result in delays, particularly if back office systems are still paper-based.

Mission possible?

That’s why we are on a mission to educate businesses on how automation can eliminate so many P2P problems and facilitate timely payment. The benefits of digital automation are almost ubiquitously recognised in this day and age, where so much of our business and personal lives are digitised, so it seems almost prehistoric to have teams of people handling paper invoices and spending hours on the telephone responding to enquiries.

Electronic invoicing increases the efficiency and accuracy of your accounts payable team so administrative errors should be a thing of the past and the number of people required to manage the process is much reduced. Another valuable aspect of using an e-invoicing solution is that suppliers can check the real-time status of their invoice at any point online. This helps to reduce calls and emails by around 60 per cent, increasing productivity for your staff and cutting costs. Moreover, once connected digitally, buyers and sellers are better positioned to collaborate more strategically.

We believe that if e-invoicing were adopted by more businesses, many of the issues that currently cause late payment would naturally evaporate. No doubt the new Small Business Commissioner Paul Uppal and the Department for Business, Energy & Industrial Strategy would be delighted with that.

To find out what is causing friction in your business, visit http://frictionfinder.com/

By Henning Holter, Head of Global Business Development, Tungsten Network Finance

Author: Dylan Jones

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