Keep your cash close and your suppliers closer

A report published earlier this year showed that mobile tradespeople and microbusinesses in the UK are owed a collective £2.5bn in outstanding payments per year. More strikingly, they write off up to 96 per cent of that debt – or around £2.4bn per year. That’s a huge burden to bear, and an action that has long-term implications because it limits these businesses’ ability to re-invest and grow.

It’s not just microbusinesses that find themselves at the wrong end of late payments. This is a problem that impacts companies small and large throughout the economy. Given that a smooth-running supply chain is critical to every company’s success, it seems counterintuitive that companies would indulge in payment practices that create conflict with their suppliers. But they do – so why is this?

The fact is that, in the wake of economic downturn, companies are holding on to their cash at all costs. The recession reinforced the premise that cash is king, and as companies have become accustomed to the benefits that healthy cash flow can bring, they are reluctant to loosen their payment policies – even as the economy improves. Today it isn’t uncommon to see multi-billion pound companies extending payments to their suppliers by 60-100 days to ensure that they have funds available for self-development, dividends or other purposes.

But regular late payments can pose a serious risk to a small supplier’s financial health, given that they have less of a financial ‘buffer’ than their larger counterparts. So, it’s unsurprising that extended payment policies are putting pressure on buyer-supplier relationships.

It’s not just policies that are delaying payments. The efficiency of the day-to-day financial processes used by buyers and suppliers has a significant impact on the speed that payments are made – and there is much room for improvement in this area, too.

The majority of companies globally have inefficient systems in place to send invoices. In fact, a study we recently conducted with the Institute of Financial Operations found that only 15 per cent of companies send out the majority of their invoices electronically. Given that a paper invoice sent through the mail typically takes two weeks to be received and entered into the buying organisation’s system, its crucial that companies find means to send and receive invoices more quickly.   

The problem is exacerbated by manual processing methods, which are also commonplace in many companies. Once received, a paper invoice must be scanned or otherwise inputted into the buying organisation’s system before it can be processed – this leaves room for inaccuracies or even loss. But if companies introduced automation to their invoice processing, the risk of both these problems would be diminished.

While e-invoicing can speed up processing, the timing of payments is still dependent on buyers, who have incentives for holding on to their cash longer. But new solutions that combine e-invoicing with e-payment are changing this dynamic and allowing suppliers to benefit from faster payments. These solutions, which combine the services of a financial institution with those of an e-invoicing services provider, ensure that suppliers are paid upon invoice approval yet also extend payment terms for buyers.  It’s a win-win situation, boosting the cash flow of both parties and avoiding the payment issues that put undue pressure on suppliers and negatively impact the buyer-supplier relationship.

The combination of e-invoicing and new e-payment solutions helps solve extended payments and supplier cash flow issues.  It not only gives suppliers quick access to payments, but it also provides buyers and suppliers with the cash flow needed to ensure their businesses can operate smoothly. With cash flowing more freely across the supply chain, buyers and suppliers can focus on what matters most: building their businesses and furthering their relationship in mutually beneficial ways.