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Late payments affect all parties involved, but none more so than freelancers and smaller businesses that simply don’t have the level of cash flow or credit to safeguard against delayed revenue.
This isn't just a result of poor financial management or lack of trade opportunities. In fact, the Chartered Institute of Procurement and Supply (CIPS) estimates that “in the UK alone, around £13bn is owed to small businesses in overdue refunds and up to 50,000 businesses are at risk of insolvency every year because they lack the reserves of larger organisations to cover such delays”.
Unfortunately, late revenue has a trickle-down effect and often a lack of cash flow means an inability to pay suppliers. This - the delayed payment to suppliers, in effect using them as an interest-free cash loan - is one of the worst things a business can do to another business. The following disadvantages shine a light on just how harmful late payments can be when it comes to supplier relationship management.
The importance of paying vendors on time
One of the biggest disadvantages of delaying payment to suppliers is the damage it can cause to the business relationship. For example, in July 2019, Prompt Payment Code signatory British American Tobacco, Prudential, Centrica, and another 16 were all removed from the Code after failing to pay vendors on time.
In addition, if suppliers have difficulty collecting on invoices - their revenue - they may find themselves financially hamstrung. One-quarter of all bankruptcies are estimated to be the direct result of returns not being received on time. Remember the trickle-down effect mentioned above? For businesses, delaying payment to suppliers causes them to suffer which in turn undermines their own operations because, ultimately, the business itself would suffer should even one supplier disappear.
Of course there are occasions where payment may be unavoidably late. If a business knows that this is going to occur and there will be a delay - no matter how short- they should immediately inform the supplier. This will set expectations and also indicate a level of respect towards the supplier.
On the other side of the coin, paying on time or even early increases the likelihood of good supplier relationships based on mutual respect and trust, raising the bar for everyone involved.
Late payments damage relationships with key suppliers
Forging strong working relationships with external parties is an effective way to achieve business growth and longevity. If you don’t respect that your suppliers have liquidity considerations of their own, then you risk self-inflicted reputational damage, imparing or even severing the connections you’ve built up over the years.
A bad reputation has significant repercussions that put a business at a disadvantage. Consider, if suppliers catch wind of a reputation for delaying payments, regardless of if they are only a little or are significantly late, they may choose not to take a risk or do so on less favourable terms and pricing. Basic survival may become more pressing than ‘business as usual’.
With profitability and goals inextricably linked, the client/supplier relationship is an essential component that supports a business’s competitiveness and operational efficiency. Therefore, paying invoices promptly avoids potential tensions and nurtures healthier - and profitable - working relationships with suppliers.
Places undue stress on employees and customer service departments
When it comes to having an advantage, low employee morale and high stress levels are two significant disadvantages of delaying payment to suppliers. When the business is at fault and payments are late, customer service agents have to undertake ‘damage control’, commencing sensitive discussions that could have potentially disastrous consequences if the talks go sour.
Furthermore, bottlenecks caused by late payments can seriously hamper a business’s accountancy department. An overburdened finance team can have knock-on effects that lead to additional errors, delays, and as a result additional late payments. This stressful way of working puts accountants on the backfoot and leads to low-quality output and eventually even complete employee burnout.
The disadvantages of delaying payment to suppliers are clear. Surely, then, there must be a solution that streamlines processes and ensures that deadlines are met.
AP automation: removing manual admin from the accounting equation
A procure-to-pay (P2P) process costs account for an average of 60% of turnover for most companies. Thus, organisations must be able to meet the demands of their clients. Paying suppliers on time to grease the wheels of commerce plays an integral role in keeping distribution healthy and clients happy. For this reason, your Accounts Payable (AP) department needs to be a well-oiled machine that’s empowered by streamlined processes.
Accounts Payable Automation technology offers that solution. Thankfully, there are experienced partners in the AP automation market that are ready to share insights and offer guidance to accelerate any learning curve.
Why is this so important?
Beyond immediate time savings, supplier process automation significantly lowers invoice duplicates and data entry mistakes. By reducing expenditure and improving management, a business can increase the value of employees by shifting them over to more strategic tasks. From PO and invoicing to archiving and storage, a digitalised P2P process gives all supplier and business stakeholders the tools to increase visibility, quality, and efficiency.
Today, we see companies turn to AP automation platforms for cost-efficient, streamlined accountancy operations that deliver payments on time and help conform to new government Making Tax Digital (MTD) regulations. A cloud-based software platform is easily scalable, accessible to all, has exponential storage capability, and can deliver a rapid, measurable ROI. In fact, AP automation can even surpass ROI expectations by turning payment into a new form of revenue, thanks to early payment rebates and favorable terms.
So, to easily avoid the potentially damaging disadvantages of delaying payment to suppliers, you need automation that works for you. This means an AP automation specialist such as Yooz who understands the complex relationships between suppliers and clients, as well as how automation can strengthen these connections.
Time to make a positive change
While there are multiple disadvantages of delaying payment to suppliers in the best of times (as discussed above), there are additional difficulties on both sides thanks to fluctuations in prices and availability. While above references the need to alert supplies when you know (or even suspect) a delay in payment, AP automation helps to ensure that this scenario doesn't occur. If you haven't already begun to digitalize, now is the perfect time to start.
Manual processes count for over 30% of AP costs and seriously put your company at risk (late payment, long invoice approval time...) In the following webinar replay, find out about the next generation of AP automation that makes high-performance technology accessible not only for finance services but for all.
