7/7/2011

By Andrew Jesse, Vice President, Basware

With research revealing that more than half of UK businesses are paid late, Andrew Jesse, VP at Basware examines why late payments are still a problem and what businesses can do about it.

 

If you could save £25,000 on a payment run of £1 million while improving relationships with your suppliers and also cutting invoice processing costs, you’d probably ask one simple question: “How?”

This is certainly the case in the current lean business climate where the pressure is on to save wherever possible.
 
The answer is to look at the speed at which businesses pay their suppliers. Recent research conducted on behalf of electronic payment company BACS shows that 53 per cent of UK SMEs are paid late. As late repayments hit a three-year high in the last quarter of 2010, large companies paid their bills an average of 36.7 days later than agreed terms. Small companies recorded the largest increase in their late payments, taking on average more than 22 days to settle invoices. 
 


The reasons behind this may vary. But in any case, late payments mean businesses can hold onto cash to invest further in activities that support their own needs — such as seasonal promotions or IT facilities — or to simply accrue more interest. 
 
But while many are doing this, it isn’t good for supplier relationships or brand reputation. Nor does it always make the best financial sense, as suppliers increasingly offer early settlement discounts to incentivise quick payments. 



Quick payment matters
: While paying suppliers early to improve your own cashflow seems counter-intuitive, the figures do add up. In the current economic climate, a typical business reserve account gives around 0.05% AER, or 0.0042% per month. 
 
However, a supplier will typically offer a 1.5% to 5% discount for settlement within 15 days. Let’s assume a company negotiates an average discount across its suppliers of 2.5 per cent. That’s 50 times what it would earn in interest by delaying payments. 
 


On a monthly payment run of £1 million, this company would earn at most £500 in interest but save £25,000 per month through early settlement. What’s more, it improves cashflow for suppliers, making it a true win-win.

Even for those industries that don’t typically offer early settlement discounts, you can be certain that suppliers will offer far better prices to those customers who pay them early than those who keep them waiting.

 However, repaying quickly is not always feasible for some companies where lengthy processing burdens or poor visibility of available capital impact ability to react quickly.



Visibility: 

Organisations often struggle to get the full picture of their cash cycle from incoming revenues to outgoing costs. As a result, many have a skewed perception of available capital, meaning that they make payments as late as possible to ensure they aren’t over-provisioning. 

The Hackett Group recently reported that most CFOs admit they are better at forecasting sales than earnings and mid-term cash flow in their business.

Finance and procurement organisations need to implement systems and processes to help forecast payments and related potential liabilities much more effectively. Automation across the purchase-to- pay cycle enables better visibility and improved management of cash. 

However, it’s not just a case of knowing the funds are available. Companies’ accounts payable (AP) systems often aren’t up to the task of hitting early settlement deadlines, even though many have deployed workflow solutions to help them realise efficiencies and savings. An average company will take 18 working days to process an invoice, some as long as 35 days. Compare this with those who have adopted full invoice automation, where it takes less than 5 days to process.



System failure
: In many cases, AP solutions focus on the front end — that is capturing invoice data, though e-invoicing or scanning, and uploading onto the accounting system. 
 
But the most vital stage is what happens after the invoice is digitised — the matching of the invoice to its corresponding PO and supporting documents, so it can be approved and passed for payment.
 
Matching is the most time-consuming phase of the process as manual tasks like finding purchase orders and goods-received notes and manual entry into business systems eat man-hours that could be better used elsewhere. 

If these matching-related tasks can be automated, then settlement deadlines can be hit, and accounting staff can have more strategic roles instead of chasing paper. So how is this done? 

 


Better matching: 
The key is to integrate the captured invoice data with approved supplier details and approved purchase order information. This demands links with core business systems so that any exceptions (such as invoices without orders) can be highlighted and escalated to the workflow of authorised staff. 

This way, invoices that match the defined criteria are automatically released for approval and payment, minimising the need for manual intervention and action. This workflow can be governed by customised, business-specific rules, enabling AP staff to manage invoice processing by exception — so that only non-matching invoices require hands-on attention for approval. 
 


This also means that key targets like settlement deadlines can be built into workflow, so they can be hit every time to capture those important savings. 

Whether businesses choose to pay early or pay later is their decision, however this decision should be made on the basis of what’s best for them and their suppliers, rather than being dictated by the constraints of their accounts payable process.

By fully automating the Accounts Payable process businesses have the flexibility, visibility and freedom of choice to make the most profitable decision.

Late payments from customers can be financially crippling for companies of any size. However, businesses can take some simple steps which can improve the process, save time and free up people to work on more constructive tasks. Customers that pay promptly are in a much better position to negotiate discounts, so it’s a successful strategy for all parties. Who would have thought that paying forward could have such a good payback?

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