Terms of Endearment: Avoiding Late Payment Penalties

No matter what payment terms are agreed between businesses, it’s increasingly common for the actual payment to be late. This point was underlined by a recent UK survey by BACS (Bankers’ Automated Clearing Services).

It found that the average UK small company is now owed £39,000 at any one time, and that businesses are owed on average 10 per cent more than last year. Critically, those hit by late payment are waiting on average 28 days above their payment terms to have invoices settled.

This is more than just an issue for smaller businesses: it has a knock-on effect that resonates through the entire UK economy.

If that sounds outlandish, consider this: SMEs with less than 50 employees represent 99.2 per cent of all UK businesses.

With so many experiencing consistent late payments, their cashflow is being squeezed, reducing their willingness to invest in their own business, let alone in others. It could be argued that the continued late payment culture in the UK is prolonging the current downturn. So it’s no surprise that so many businesses have asked the Government to help address this issue.

Why are late payments such a persistent problem? Some believe that larger firms are using their power in a business relationship to impose long payment terms on their suppliers, taking advantage of suppliers’ goodwill. Or that firms are delaying payment as long as possible to retain cash. However, the situation may not be as clear-cut as this.

The survey found that the most frequent excuse businesses hear about delayed payment is a hold-up in internal systems – 55 per cent of respondents said they were told their invoice is waiting for authorisation or is being processed by accounts. And of course, most businesses regard being told this as an excuse, to hide a deliberate squeezing of suppliers. But what if it’s actually true? That payment is genuinely being delayed because of inefficient accounting processes and poor practice?

Late payment payback
Whatever the cause, if a business is consistently missing its payment terms, it needs to rethink its processes – not just from a desire to improve relationships with suppliers, but also because of upcoming legislation.

Thanks to intensive lobbying from influential UK industry bodies representing small businesses, the EU Late Payment directive is set to be introduced in the UK in 2012 – a year earlier than originally planned. The directive aims to reduce the burden of overdue payments on businesses by making 30-day payment terms mandatory (if no other terms are agreed), and also enables suppliers to levy penalties and interest on overdue payments.

This may well be the catalyst for changes in payment practice – with companies needing better visibility and control over their payment processes in order to avoid such penalties, and to be perceived as a ‘good business partner’.

But how should companies ensure that their payment systems and processes are capable of tracking and hitting settlement deadlines? The secret is gaining control of purchase-to-pay processes, which then gives an organisation’s financial controller choices of how and when to pay, in order to best suit their agreements with suppliers and their working capital strategies.

Matchmaking matters
Having an automated invoice processing solution is a key first step, to ensure that invoices are received electronically, or data is taken off paper documents through scan and OCR thus enabling electronic processing.

Such automation need not be expensive, nor demand a significant upfront investment: both cloud-based solutions and outsourced services are available to deliver this capability on a pay-per-invoice or monthly fee basis, making them accessible to even to start-up firms.

The most important stage with these solutions is the matching of the invoice to its corresponding PO, contract and other supporting documents, so that all evidence for prompt approval and payment is available to AP and other staff in the approval process. It’s usually these areas that are responsible for delays in manual AP systems.

The second issue is ensuring that the staff who approve invoices can do so quickly and easily. Manual tasks like finding supporting documentation, checking and consolidating can cause delays that could mean payment deadlines are missed.

So automation is critical, as is the ability for AP staff to access their invoice workflow wherever they are. A cloud-based solution is ideal for these circumstances, enabling invoices to be processed on handheld devices, laptops, or when working from home. Integration with other business systems is also critical, so that any exceptions (such as invoices without orders or incorrect coding) can be highlighted, and escalated where needed.

This significantly reduces leakage errors (duplicate payments, overpayments) and also means that targets such as settlement deadlines can be built into the workflow, so they can be hit every time and ensure that penalties – as well as friction with suppliers – are avoided.

Taking control
So whether late payments happen simply because of inefficiency or as a result of deliberate action, companies will have to take more control of their Accounts Payable systems in order to avoid exposure to the risk of penalties.

This control also gives insights into the real financial flow through an organisation, which is a key instrument that a savvy financial controller can use to maximise return on business capital.

The fundamental point is to ensure that systems are integrated, so that staff can track the status of invoices throughout the payment cycle and be aware of those that are close to deadline. But for companies that have that level integration and control over their payments cycle, AP automation offers a real payback.