As a finance professional you may be aware of one of the industry’s biggest problems: late payments.
The costs of delayed payments to finance teams range from higher processing costs and lost opportunities for early payment discounts, to strained relationships with vendors and suppliers – not to mention tightened cashflow that inhibits the company’s ability to grow and thrive.
In this article, we’ll explain the latest industry research that demonstrates late payment issues, why they frequently occur and how they can impact your business. We’ll also share specific actions you can take to reduce late payments, help your finance team run more efficiently and improve relationships with your suppliers.
How Common are B2B Late Payments?
Industry research shows late payments continue to vex the finance industry. In our recent survey of 500 middle market finance professionals – from a broad range of industries such as finance and technology – only 59% said they almost always pay their bills on time.
Similarly, a recent report from Deloitte cites payment delays as a major pain point for middle market companies. The report states 30% of middle market businesses quote payment processing time as a major issue and that it takes an average of 30 days to complete a payment.
On the other side, in our survey of 700 business leaders during the pandemic, less than one third (31%) of respondents said 75% or more of their customers pay them on time.
Last year, the UK updated its Prompt Payment Code (PPC) to ensure larger companies pay small businesses within 30 days to help improve cashflow and relieve pressure on business owners.
What Causes B2B Late Payments?
Inefficient invoice approval processes
Overdue payments often stem from inefficient invoice processing and approvals. In our recent survey, we asked finance professionals to name the biggest pain points they experience in their financial workflow processes. Of the respondents, 23% cited lengthy approval cycles and the inability to approve invoices in time to capture discounts. This can lead to time-consuming invoice processing, late payments and lower cashflows.
Paper trail and snail mail
Reliance on paper invoices and paper checks can lead to late payments because they add time to the invoice and payment processes. For example, mailing paper invoices or checks could take 1-5 business days, whereas digital invoice submission or digital payment options can be sent instantaneously. Plus, this timing doesn’t factor in delivery delays or risk factors such as letters getting lost or intercepted by fraudsters.
Hybrid/remote workforce
According to data scientists at Ladders, remote working arrangements are here to stay. They are predicting that 25% of all professional jobs in North America will be remote by the end of 2022, and that number is expected to increase in 2023. Reliance on paper invoices and checks will further slow down the process as AP professionals won’t receive their mail every day if they’re not going into the office regularly. Adoption of technology can help with this issue by digitizing invoices and checks for easier access. According to our survey, 78% of respondents whose organizations have adopted technology in the last two years believe it will have an impact on their business continuity moving forward.
Other causes of late payments include:
- Purchase orders filled out or matched incorrectly
- Overwhelmed finance teams
- Outdated supplier information
- Lack of visibility of invoice and payment details, such as due date, amount and status
- Post office delivery delays
Late Payments Strain Supplier Relationships
Late payments can negatively affect both buyers and suppliers. According to the Deloitte report, around 47% of suppliers are paid late for their products or services. This can harm business relationships with suppliers and cause them to incur additional costs due to late fees or the removal of discounts.
The costs of late payments can add up in other situations. For example, a supplier may send a second invoice if the finance teams don’t pay them on time. If the finance team doesn’t realize it’s the same bill, they may make a duplicate payment that becomes tough – or even impossible – to retrieve.
In addition, recent research suggests that late payments negatively affect the mental health of small business owners, causing stress, anxiety and depression. If a business consistently pays late, suppliers may choose not to work with them in the future.
How to Improve the B2B Payment Process to Reduce Late Payments
Your finance team can reduce late payments by taking the following steps:
1. Automate the accounts payable (AP) process
Use AP automation software to reduce steps in the invoice and payment process. For example, automating the AP process means you don’t have to follow up with business leaders directly by email, text and phone calls to approve invoices. You can set up custom workflows to automatically route invoices and payments for approvals and send reminders to ensure deadlines aren’t missed. In addition, you can automatically reroute approvals if someone is out of the office on vacation to keep it moving.
In our recent survey, 33% of respondents said quicker approval of invoices was the greatest improvement in their AP process since implementing an automated AP system. This was the top answer.
But don’t just take our word for it. Bridge Community Health Clinic says since it implemented automated AP, it can now process and pay all 250-300 monthly invoices in roughly two days – compared to two weeks with its previous process. That is an 86% reduction in the time it takes to process its payments.
Digitizing invoices also ensures faster delivery and the ability to receive and review them from anywhere, at any time, which is extremely important for business continuity in hybrid and remote working environments.
2. Trade paper checks for digital payments
Ask your suppliers if they will accept digital payments, such as virtual credit cards, instead of paper checks. Digital payments are inherently faster to execute, plus they can help save money on the physical cost of paper and postage. According to Goldman Sachs, these supplies alone cost $1.55 per check. The benefit to suppliers is faster payment delivery, plus it’s more secure because you reduce the risk of check fraud.
3. Be transparent with your suppliers
When it comes to payments, talk with suppliers individually to find out how they would like to get paid. This goes beyond the payment form. Share your approval processes and timelines, and work with suppliers to adjust due dates to ensure they get paid on time. Ask them if they offer discounts on early payments or digital payments.
It’s also helpful to keep them in the loop on payment statuses. Your team may field calls from suppliers asking for the status of certain invoices, which can be time-consuming. Certain AP automation tools provide a portal where suppliers can check the payment status at any time, and others provide customer service representatives to field those calls for you. Transparency is key to building strong relationships with your suppliers.
These practical steps can help your business avoid late payments, improve cashflow for business growth, and improve your relationships with your suppliers for mutually beneficial business relationships.