When it comes to running a business, everyone has heard the saying: cashflow is king. We all know that late payments limit cash flow, but even if you eventually recover the money, there are a raft of other costs to consider when dealing with late payments.
The costs to your business are enormous, and when added up are far higher than just the amount of the outstanding invoices. Here we break down all the other costs to show why it’s so important to get paid on time. We’ll also show you how you can ensure your customers pay their invoices promptly, so your business continues to thrive.
Credit is still the norm
Despite the fact that in 2019 we’re moving toward a cashless society where everyone can make payments instantly (and often prefer it that way), most businesses still rely on credit based trading terms. In the food and beverage industry, it is still the norm for a customer to place an order without paying, receive the goods, and pay up to 30 days later. It’s seen as a necessity in many situations, and many credit-based transactions go just fine. However, there’s always going to be a percentage of customers that might have cash flow problems of their own and can’t (or won’t) pay invoices in a timely fashion.
Here are all the true costs of those late payments:
Limited Cash Flow
Over $19 billion is locked away from Australian businesses every year due to late payments, according to Dun & Bradstreet research. On an individual business level, poor cash flow is responsible for 90% of SME failure. This is because it’s ridiculously common - the research shows that just 38 per cent of business invoices are paid on time.
The major downside of no cash flow is obvious. Without money to spend, there is no business. If you’re not getting your invoices paid on time, you can’t pay your own bills - including payroll and rent.
However, for most businesses, they still get some money coming in, just not all money. It might not be totally crippling, but it does stifle your ability to innovate, stay ahead of the competition and your potential for investment if you are always playing catch up.
Unfortunately, so much of your cash flow is in the hands of the people that owe you. It’s up to them whether you get paid on time or not. Those people are in control of your destiny, but they don’t have any responsibility or interest in keeping your business afloat. They are just thinking of their own.
Stress isn’t just something you have to deal with as a business owner. It’s a real-life cost to both you personally and to the business. Whether it is financial stress on the company or physical stress to you, it is difficult to overcome and debtors owing you money is definitely a major cause.
Not only can it affect your quality of life, give you physical symptoms, affect your sleep and concentration, but it stifles the creativity and energy you need to keep growing your business. Further, a stressed out business owner has a direct impact on employees. Going into a negative workplace each day can take its toll over time, and this can mean losing great staff members and having to recruit and train new ones, only to have the same issue again.
Recouping Bad Debt
Another point many businesses don’t register is the actual cost of recouping bad debt. Here’s where you can really start to quantify what late payments are really doing to your business.
Let’s say your business has a profit margin of 20%. If you’ve got an unpaid debt of $5,000, it’s going to cost you $25,000 in new revenue to make up for that $5,000 debt. If your margin was 10%. You’d need $50,000 in sales, before you’ve made up for the loss, let alone actually made a profit or actually grown the business.
Another often ignored cost is interest. Many businesses borrow money to bridge gaps between payments, but nothing comes for free, especially when it comes to loans. For every $10m of annual turnover, a three-day drift in an invoices due can take a $115,000 bite out of working capital.
Standard business finance has a 10% interest rate, so in that example there would be an extra $8,200 in additional interest expenses.
This is another cost people don’t tend to add in, but is a very real one. If you’re diverting resources to chasing invoices, you’re losing out on the productive activities those resources would otherwise be going to. Often, it’s at the expense of winning new business. So think about the money you could have earned from sales, or launching new product lines, or new marketing initiatives, or whatever you are not doing because of your late bills. That’s your opportunity cost.
It also has a compounded effect. The opportunity cost is additional to the amount you’re spending (e.g. in employee time) on chasing those bills.
Employee time spent chasing late bills
If you’ve recognised that you have a problem with customers paying late, and employed someone to chase those invoices (or put one of your employees on the task), congratulations. That’s a great first step and is likely already making improvements. But don’t forget to think about how much it’s costing you to employ that resource. For example, if you had an accounts administrator on $30 an hour, who spends half a day per week chasing up invoices, that’s $360 a month, or $4800 if they are full time.
Debt Recovery Costs
If things are getting serious and you’ve got some really long term debtors, you might need to take action against them. This has even more costs associated - lawyer’s fees, debt collection agencies and anyone else you need to involve to recover that money.
Debt Risk Policies
Many businesses introduce policies and procedures to minimise debt risk. These include credit insurance, offering early or on time payment incentives and discounts, running credit checks on new customers or deciding not to do business with risky clients. All of these things come with costs that add up, or cut into your profit margins.
So what can we do to reduce these costs?
Learn how Di Pacci's Micheal Rababi solved their cash flow problems
It’s time to stop being your customer’s interest-free bank
The common factor of many of these costs - from on time payment incentives, debt recovery costs, employing someone to chase late bills, opportunity cost, interest costs - is that they are all as a result of capitulating to customers that want to pay on delayed terms. And given how endemic it is for businesses to pay late (remember, only 38% are paying bills on time), it’s simply not a good way to do business in a time where everyone’s got access to digital payments and likely has credit cards. If your customer can’t afford to pay upfront for goods, and wants to wait until they’ve made their own sales, why does it become YOUR responsibility? Why is it the default that YOUR business acts as the interest free bank for them? Why do YOU have to take on the risk?
Other businesses now have so many options to solve cash flow problems when it comes to purchasing goods. They can get a credit card, and thus take back the responsibility for their own late payments. They can get bridging loans, and they can pay the interest, instead of essentially getting you to pay it for them.
So with that in mind, why are we still letting businesses pay late?
Facilitating Upfront Payments
If you want to stop taking on the responsibility of your customer’s payment practices, it’s easy. Simply allow them the pay by direct debit or credit card. Ordermentum allows you to easily set up credit card or direct debit as an option, with funds settled daily into your bank account. Just imagine how it would feel to have payments constantly coming in, and how that would transform your business and what you can do with it.
When it comes to credit card payments, you’ll be surprised to know that many customers actually prefer to pay by credit card. Plenty of credit cards offer extended interest free periods and reward customers with frequent flyer points and other perks. Points and incentives from credit card companies add up very quickly when making business purchases.
Plus, when the payment method is set up automatically in Ordermentum, it’s far more convenient than having to remember to pay invoices a month later, spending a day (or more) just processing payments and getting chased by frustrated suppliers. On top of that, the ‘Uberification’ of many payment practises means people are more used to paying with a saved credit card than ever before, and actually starting to get annoyed at having to pay for things manually.
The hybrid option: delayed payment via credit card or direct debit
We strongly believe the industry is ready for wholesalers to start taking payment up front, and your customers have plenty of options to manage their cash flow to allow for it. However, if you’re not ready to make that a requirement, you still have options. Many of our customers implement credit card or direct debit payments, but take these charges according to their agreed terms.
If you have agreed that invoices are paid 30 days after the goods are delivered, you can still set up credit card or direct debit payments, but schedule them to be charged after 30 days (or 7, 90, or any number of days). This gives you more certainty as the charge automatically comes out on day 30 and you’re not relying on your customer to remember and schedule in your bill payment. It also still gives your customer flexibility and time to sell the goods they purchased and maintain their own cash flow.
If you haven’t guessed by now, we think it’s high time the industry shifted and suppliers took back a little control. Stop being your customer’s interest free bank, and trust that if your customers can’t pay for 30 days, they have plenty of options available to bridge that gap that don’t put all the risk on you.
If you do still want to operate on delayed terms with your customers, the best thing you can do is switch your payment to a digital method, where you at least have some control and certainty over when the money comes out.
Sure, credit card and direct debit payments incur a small payment charge (0.5%-1.5% with Ordermentum), but it absolutely pales in comparison to what late payments are costing your business.