Late payment – getting to the heart of the matter
The main reasons for late payment run contrary to many people’s expectations
By the end of the month, the UK government will put in place new regulations that require medium and large businesses in the UK to report on their payment policies, practices and performance. This directive comes from the Department for Business, Energy & Industrial Strategy in the hope that it will encourage a change in poor payment practices and reduce late payment to SMEs.
While this approach may cause some firms to pay more quickly, Tungsten Network research has revealed there are a myriad of reasons why businesses don’t pay on time and it can be more complex than to assume intent. Tungsten Network’s Friction Index research, carried out in conjunction with the Institute of Finance and Management (IOFM) to explore the sources of friction in the supply chain, found that the main reasons for late payment run contrary to many people’s expectations.
Nearly two thirds (64%) of businesses surveyed cited slow internal processes as the biggest obstacle to timely payment; 39 per cent lack of automation; 27 per cent administrative errors; 20 per cent team capacity to manage the volume and just 16 per cent said they delay payment to manage cash flow.
Almost half (47%) of businesses admitted that at least one in 10 payments to their suppliers are made after their agreed payment terms. Only five per cent said they always pay their suppliers in the time promised and one in 12 said they fail to monitor their payment practices altogether.
This research helps us get to the heart of the matter. It is not necessarily wilful sluggishness on the part of buyers that causes late payment, rather much of the issue seems to stem from the way Accounts Payable departments manage the payment process.
There is a common misconception that late payment is always down to working capital issues or to businesses holding on to their funds for as long as possible. While this can be the case, our research shows that more often than not it is clunky internal processes and slow paper-based systems where invoices are manually processed and too often reworked from department to department, which are the predominant causes. All this leads to friction in the supply chain which damages business productivity.
Chasing payments has long been a frustration for suppliers and buyers alike and it often poisons good working relationships in the supply chain. Businesses need to get paid for the work they do and struggling to get access to funds causes unnecessary headaches.
For buyers, arranging invoice payments can be a complex task, particularly if they’re cross-border and involve ensuring compliance with local tax laws. It is unsurprising that such involved processes often result in delays, particularly if back office systems are still paper-based.
That’s why Tungsten Network is on a mission to educate businesses on how automation can eliminate so many P2P problems and facilitate timely payment. The benefits of digital automation are almost ubiquitously recognised in this day and age, where so much of our business and personal lives are digitised, so it seems almost prehistoric to have teams of people handling paper invoices and spending hours on the telephone responding to enquiries.
Electronic invoicing increases the efficiency and accuracy of your accounts payable team so administrative errors should be a thing of the past and the number of people required to manage the process is much reduced. Another valuable aspect of using an e-invoicing solution like Tungsten Network is that suppliers can check the real-time status of their invoice at any point online. This helps to reduce calls and emails by around 60 per cent, increasing productivity for your staff and cutting costs. Moreover, once connected digitally, buyers and sellers are better positioned to collaborate more strategically.
We believe that if e-invoicing were adopted by more businesses, many of the issues that currently cause late payment would naturally evaporate. No doubt the new Small Business Commissioner Paul Uppal and the Department for Business, Energy & Industrial Strategy would be delighted with that.
View the results our Friction Index 2017 at www.tungsten-network.com/procure-to-pay-friction/