Arguably, one of the most frustrating things about acquiring services from any supplier, is arranging for them to be paid. For some businesses, having to remunerate another organisation for services provided is such a bind, they delay payment for as long as is practicably possible before the legal letters start arriving.
There are various reasons some businesses defer payments for so long. Sometimes it is because they’re experiencing cash-flow problems, on other occasions there’s a dispute as to the service that’s been provided. In most cases when suppliers don’t get paid on time, it comes down to poor administration of overly complex procurement processes.
In this piece though, rather than looking at how you can make sure suppliers are paid on time, we’re going to look at why you should make sure they’re paid on time.
*Spoiler alert – It benefits you just as much as it does them.
It keeps innovation alive
Many new businesses come into being because those behind it had an idea as to how something could be done differently, and potentially better. Unless they’ve received significant backing, such businesses are reliant on their customers paying promptly and in full to continue with their innovation and enterprise. If their operations are interrupted badly enough by late payments, it can easily lead to their front doors closing forever.
The most precarious time for any business is in those early years. Indeed, start-up support website, Smallbusiness.co.uk, found that 4 in 10 new businesses fail in the first five years. It’s difficult to determine how many of these businesses collapse due to late payments, but if it’s only one, it’s too many.
For the current and would-be customers of those businesses risking closure, this is bad news. A vibrant marketplace means a greater choice of products to choose from, and healthy competition means these products are constantly subject to innovation and improvement. This can only be a good thing for their customers; for you. Stifle their payments, and ultimately, you’re stifling your own choice of quality, innovative products.
It’s the law
The issue of late payment of undisputed invoices has been a bugbear for the UK government for some time, recognising as they have the damage it does. Their response has been to go down the legislative route.
The Payment Practices Regulations (made under section 3 of the Small Business, Enterprise and Employment Act 2015), require large companies and LLPs to publish specific information regarding their payment practices and policies. The Regulations came into force during April 2017 and will apply to financial years that start after that point. Businesses will then be obliged to report on a six-monthly basis.
Bolstering the regulation is The Prompt Payment Code, which requires comprehensive external reporting on invoices paid within contract payment terms, and those paid late.
The aim of all this is to introduce greater transparency, so that suppliers can easily identify which businesses are “good payers” and which are not. And for those that aren’t, the law now stands behind the suppliers awaiting payment.
It keeps prices low
For every action, there is an equal and opposite reaction. Consistent late payments to suppliers is an action that comes with reactions of its own, and these invariably have a monetary value. Take these three as prime examples of supplier reactions to late payments which end up costing you more:
- Suppliers increase their prices to allow for the additional cost of financing your late payment.
- They respond to your late payments with measures that disadvantage you. For example, imposing premium charges for urgent deliverables, or applying restocking charges when you return unneeded items.
- They prioritise ‘good customers’ that pay on time by assigning to them the best people, quicker deliveries and more flexible terms.
A vibrant supplier market, kept afloat by timely client payments and fuelled by competition, can usually be reflected in prices. If you want to benefit from cheaper prices, you need to do your bit by paying on time and keeping as many players on the field as possible.
It saves time and money
Suppliers don’t just react to late payers with punitive measures, they react with a pursuit that can be highly inconvenient to your business. Be certain that if you miss a payment deadline, the supplier will call you. They’ll also call your accounts payable team, they may even call or email your Chief Executive. This all takes time to deal with, time that could be spent adding value to your customers.
Failure to raise Purchase Orders, receipt goods, to register the receipt of invoices; these all lead to late payment, re-work, mistakes, and waste. Much of the inefficiency created by poor payment practices, or lack of understanding of complex procurement procedures can be addressed and prevented with automation. Research group Gartner, state that typically the cost of processing an invoice in the UK averages between £4 and £25. In some cases, it can even be up to £50 per individual invoice.
Whilst obtaining data comparable to your own organisation isn’t always easy, the cost of invoice processing using procedures without automation tools is typically up to 20 times higher than processes that are highly automated. Automated processes are typically paid on time and at significantly lower cost to you and your suppliers. In business terms, it’s a no-brainer.
It boosts your reputation
As a functioning business, you are only as good as your suppliers. If you receive a defective, unreliable, poor-quality product or service which you develop or sell on then it is your business that suffers. When a business runs into financial difficulties, the quality of their product and services are often one of the first things to be compromised, and it’s a chain reaction that ends with your customers complaining.
It’s not just your reputation with your customers that can be damaged by late payments to suppliers, it’s damaged with the suppliers themselves. If you’re in the habit of missing payment deadlines consistently, you can be assured that word of that gets around. And if you are deemed a risk to trade with amongst suppliers, suddenly it’s your business that’s in peril. In extreme circumstances suppliers will start to demand upfront payment which can have a catastrophic impact on your cashflow.
It makes companies more willing to help you out
Whatever your business, there are times you run into one difficulty or another. It’s inevitable and it happens to everyone. It’s at those moments you need your friends. An advance on an order, a few days grace beyond a payment deadline, a plug on social media, a work experience slot for your nephew. It could be anything.
If you’ve always treated a supplier well and paid them on time, you’ll find they’re often quite flexible when you need a favour. Likewise, if you’ve been an unreliable payer, don’t be surprised to find they’re not queuing to help you out in your hour of need.
It protects smaller businesses from harm
As much as the above are reasons enough to be paying your suppliers on time, it’s also the right and ethical thing to do. You acquire a service that meets your expectation, you pay for that service when requested to do so. Anything else is just bad business.
You’re also not just inconveniencing a supplier by paying late, you could be putting them at real risk. Figures released by Bacs Payment Schemes revealed that 1 in 5 small businesses say that they face being driven into bankruptcy if they are owed between £20,000 and £50,000. That’s people’s livelihoods. It’s how they pay their mortgage, how they feed and clothe their children.
The benefit to you from playing your part in protecting these businesses with timely payments won’t just be a financial one in the long run, it’ll benefit your conscience. In this day and age, there’s a lot to be said for that.