Late payments are turning into an epidemic, putting many companies at risk

Ensuring timely payments

Late payments, the curse of the credit-control department, are getting later. “Only about one-quarter of all companies pay on time,” sales director Joseph Clare says. ComparetheDCA is a website that allows creditor companies to assess the relative merits of debt collection agencies.

In fact, the habit of paying as late as possible is turning into an epidemic in the UK. Some of Britain’s biggest department stores have pushed payment terms as far back as 90 days (“an abuse of their power,” one consultant told StrategicRISK).

Worse, some payments aren’t turning up at all. Last year, about £55bn (€68.2bn) in payments due were written off, posing serious risks to businesses in terms of illiquidity, deteriorating credit ratings and higher bank lending rates.

The dangers are considerable. Steve Wright, product development manager at London-based VocaLink, a specialist in payments systems, says: “When times are tough and many companies face painfully high interest rates on their overdraft facilities, late payments can cause real challenges.”

The way things are …

Few firms pay within 30 days. The 30-day period is only a rule of thumb that has no basis in historical practice. In Britain, the average payment delay last year was 42.1 days, which is higher than in many other countries.

It’s cashflow, stupid. Too many companies focus on sales at the expense of credit control. Without an agreed date of payment in a sales contract, a small supplier is likely to run short of working capital.

Too trusting. Firms often rush to meet an order before they have received the appropriate documentation, such as a proper contract or even a purchasing order and, as a result, later run into payment problems.

Too many accounts. Bigger companies with multiple customers routinely run hundreds of bank accounts. This results in a fragmented view of the overall late-payments picture.

Only about one-quarter of companies pay on time”

Joseph Clare,

Exporters are vulnerable. Unpaid invoices to foreign customers, especially non-English-speaking ones, are a particular problem. Moreover, invoices for exports are usually the highest value ones.

HM Revenue & Customs (HMRC) is getting tougher. In the immediate aftermath of the financial crisis, tax authorities were prepared to be lenient on companies pleading cash flow problems for late payment of taxes. Now, they’re cracking down and demandingdocumented proof of problems.

Some countries pay up sooner than others. While British companies are notoriously late payers, German and Dutch firms, among other European nations, are gratifyingly punctual because state laws require them to be.

Debt collection agencies are seen as the last straw. Most companies fear, wrongly, that putting a debt collecting agency on the case will imperil their relationship with a valued, if late-paying, customer. In fact, the door-smashing image of the industry is outdated.

Big companies have the same problems as smaller ones. The scale may be different, but even FTSE 100 companies run into cash flow difficulties because of late or delinquent payers.

Invoices are an asset. Few companies realise that their unpaid invoices have a value and can be used to raise working capital. “Invoice financing is an effective way of raising short-term finance,” says Christopher Shaw, founder of Platform Black, which matches up sellers of invoices with lenders.

… And the way they could be

Stipulate a 14-day payment period. “Why 30 days?” asks London-based chartered accountants Numerion Associates managing partner Ibrahim Aziz. “Service-based companies in particular should agree to a 14-day period.” Aziz, who has advised hundreds of companies on credit control and cashflow issues, says it’s important to set the terms up front in a formal procedure. “In every case, this has hugely improved cashflow,” he says.

Sales and credit control go together. Both departments should work together, matching sales with invoices and collection. In short, an order should set off a disciplined process that goes straight back to the credit department.

Get the documents first. Don’t do anything without a purchase order, not even for long-standing clients. It’s the start of the payments loop on which the whole system depends.

Fast invoicing. Send your invoice as soon as the service is rendered, not at the end of the month. Aziz says: “Get your money on time, every time.”

No payment, no service. Never do work for a company that hasn’t paid its last bill. Consultants warn to ask for a bank transfer before starting.

Simplify your payment systems. Big companies are increasingly looking to pool cash into a single account with virtual accounts and an electronic payments system. This is the way to achieve visibility, says Wright.

Foreign late payers. Debt collectors with an international network can do wonders. A British exporter recently retrieved a substantial debt from Turkey thanks to a French agency with its own Istanbul office whose staff knew the language and the law. An electronics multinational recently floated onto its entire $70m (€38m) ledger of overdue debts in several countries for analysis by debt collectors who then made competitive quotes.

Queen’s shilling. Deferred tax is your own late payment. Take tax out as you go because HMRC will want its money sooner rather than later.

Cash for receivables. Platform Black, an innovative invoice-trading site, matches up a wide range of lenders including cash-rich corporate giants with an SME lending out some, or all, of its receivables to get a bit more working capital. The company uploads, say, £20,000 (€24,800) worth of invoices to get £18,000 on a 30-day loan against a fee. The higher quality the invoices, the lower the fee because lenders bid on the business.

Don’t dally. Most companies wait far too long to ask for help. Clare says: “If there are no outstanding disputes between the parties, seek professional help on the 32nd day. It’s proven that the longer a company leaves a debt outstanding, the less chance it has of getting it back.”