Avoiding late payment penalties: terms of endearment

No matter what payment terms are agreed between businesses, it’s increasingly common for payments to be made late. 

A recent survey by BACS found that the average small UK company is owed £39,000, a figure that’s grown 10 per cent in 2011. Critically, firms are waiting an average of 28 days above their agreed terms for payment. 

It’s not just an issue for smaller businesses: it resonates across the UK economy. SMEs of under 50 staff represent 99.2 per cent of all UK businesses and with so many experiencing late payments, their cashflow is being squeezed, reducing their willingness to invest in their own business, let alone others.

The most frequent excuse businesses hear for delayed payment is hold-ups in internal systems – 55 per cent of BACS survey respondents were told their invoice is “waiting for authorisation” or “being processed by accounts”. While this is viewed as an excuse, what if it’s true? That payments are genuinely delayed because of inefficient accounting processes and poor practice? 

Late payment payback

Thanks to intensive lobbying from industry bodies representing small businesses, the EU Late Payment directive will be introduced in the next year in the UK. Aimed at reducing the burden of overdue payments by making 30-day payment terms mandatory (if no other terms are agreed), it will enable suppliers to levy penalties and interest on late settlements. 

This may well be the catalyst for change in payment practice. But how should companies ensure that their payment systems and processes can track and hit settlement deadlines? 

The secret is gaining control of their purchase-to-pay processes, which then gives an organisation’s financial controller choices of how and when to pay, in order to best suit their agreements with suppliers and their working capital strategies.

Cash control

A company should be able to establish its true financial position at any time in terms of key parameters including Days Sales Outstanding, Days Payable Outstanding, and the status of all of its receivables and payables. 

For purchasing, this means having an efficient process for matching of purchase invoices to their corresponding POs, contracts and other supporting documents, so that all evidence for prompt approval and payment is available to AP and other staff in the approval process. This in turn enables any queries to be raised and handled before delays become critical, helping to avoid the risk of penalties. 

For sales invoices, this could mean working with key partners to establish if they have received your invoices, whether there are any queries about them, or whether they are approved and scheduled for payment. This detail on the status of receivables can be fed into reports that summarise expected incoming cashflow and, together with data from purchasing, gives a more assessment of the amount of working capital required.

While it’s possible to build efficient paper-based systems to achieve this level of financial control, increasing invoice volumes mean that manual tasks such as finding supporting documentation, checking and matching it can cause delays, which could lead to missed payment deadlines. 

Automated invoice processing can help here, and needn’t demand significant upfront investment: cloud-based solutions and outsourced services are available on a per-invoice or monthly fee basis, making them accessible even to start-up firms.

The fundamental point is to ensure that purchasing processes are as seamless and integrated as possible, so that staff can track invoices through the payment cycle, and be aware of those that risk attracting penalties. Not only does this give a better insight into the real financial flow through an organisation, it also helps you stick to the terms that will endear you to your partners.

Lucy Beck is UK sales director at Palette.

Share this story