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late_payments

How to avoid the dreaded late payments penalty

23 Dec 2015
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Managing suppliers is a fundamental aspect of sound business practice yet many organisations are failing to pay suppliers accurately and on time.

Late payment has an obvious negative impact on the cash-flow and credit status of suppliers. However, it’s also important to remember that delays in processing invoices can distort financial reporting for the customer and give an inaccurate picture of its current liabilities. Speed of invoice payment is also a key indicator of credit risk for businesses, so a policy of late payment will impact the customer’s credit rating in the longer term. It is in everyone’s interest to ensure that bills are paid in a timely manner and late payments are avoided.

Problems associated with late payments

Paying suppliers late can result in a number of problems:

  • It can result in duplicate payments: Suppliers will often issue a second (and third…and fourth) invoice if the original is not paid on time. This leads to duplicate payments when invoices are not tracked by even the most efficient internal systems. The risk of making duplicate payments is much lower for businesses that pay their bills on time.
  • It damages the supplier/customer relationship: suppliers can experience cash flow challenges which are often exacerbated by late paying customers. Customers need to recognise that suppliers are critical not just because they provide the business with essential materials, but because they also provide valuable trade credit.
  • It damages future relationships: there is a long-term advantage to paying on time, as on-time payments today can result in more favourable payment terms from suppliers into the future. In contrast, businesses that acquire a reputation for late payment are likely to be treated with distrust by suppliers, finance providers and potential business partners into the future.
  • Late payments create aggravation within the paying business: Resentment can build within a company due to increased workloads and calls (or visits) from frustrated suppliers arising from late payments. The costs of handling supplier queries and re-negotiating payment terms can quickly outweigh the cashflow benefits that the business may enjoy as a result of making its payments after the due date.
  • Inaccurate reporting: businesses that do not acknowledge or pay invoices in a timely manner will inevitably struggle to give an accurate picture of their financial position at a point in time. Add to this the fact that the finance team is spending a significant amount of time handling supplier queries rather than performing its normal finance functions, and you have a recipe for chaos!

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New rules to combat late payments

The negative economic impact associated with the practice of late payments has been acknowledged at the European level and the EU has responded by introducing rules around the issue. Adopted by the EU in February 2011, Directive 2011/7/EU on combating late payment in commercial transactions in has now been implemented in national law by EU countries. The public and private sector now have to pay penalty interest to their suppliers if the time lag from invoice to payment is longer than 30 days. Late Payment rules have incentivised more efficient payment processes, particularly in the public sector and this has had a positive knock-on effect for suppliers. With prompt payment now essential, accounts departments in all public bodies have had to look at their Accounts Payable (AP) processes to ensure that the 30 day limit is met.

Late payments in the UK

A recent survey by BACS (Bankers Automated Clearing Services) found that the average UK small company is owed £39,091 at any one time. The survey also found that while almost 40 per cent of businesses are aware of the government measures to help business affected by late payments, 72 percent were unconvinced that these measures would speed up payments to them.

Mike Hutchinson from BACS, said:

“The on-going issue of late payments means that businesses across the UK are facing some tough choices about how to use the cash available to them. They are concentrating on keeping their own businesses afloat rather than paying suppliers, and so the vicious circle continues”.

Late payments internationally

The problem of late payment is not just a domestic one. In a Censuswide survey commissioned by Fexco Corporate Payments, of 102 CFOs and key decision makers in large UK firms that trade overseas, 34% admitted to regularly paying overseas suppliers after their payment terms. Asked if overseas suppliers are stricter than their UK counterparts when it comes to payments terms, 38% of respondents said that, if they pay late, they receive a late payment charge immediately from their overseas suppliers. Interestingly, 54% of respondents claim that they prefer to wait until currency movements were in their favour before paying overseas suppliers.

Speaking in the International Business Times David Lamb, Head of Dealing at Fexco Commercial FX Services commented:

“It’s interesting that the most common reason given as to why businesses are paying overseas supplier late is because they are waiting for currency movements to be in their favour. But the reality is that there are a number of ways for companies to hedge against currency fluctuations without having to pay their suppliers late and potentially jeopardizing their relationships.”

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Taking control

Late payments can occur as a result of deliberate action but equally as a result of inefficiencies in the payments function of a business. Accounts payable teams can do much to avoid a late payments culture creeping into the organisation.

Here are just a few tips to ensure the good relationship between customer and supplier remains intact and penalties are avoided:

  • Companies with streamlined accounts payable systems are efficient in terms of time and staffing and reduce costs and errors which often result in late payments. Many businesses, especially start-ups, may not have the streamlined processes in place to initiate payments effectively, but these kinds of processes are absolutely essential for large businesses that are paying hundreds of suppliers. Recognised payments specialists can customise business processes, interfaces, reports and other outputs to help businesses make payments effectively, securely and quickly. Payment solutions that integrate with accounts packages offer an effective way of streamlining the payments process.
  • It is important to categorise suppliers according to who enforces late penalty policy and/or who offer an early payment discount. By doing so, businesses can pay priority suppliers on or before the due date thereby improving cash flow not to mention goodwill.
  • When paying overseas suppliers, avoid simply watching the market and waiting for the exchange rate to improve as uncertainty will inevitably lead to a missed payment due date. Currency risk management tools are available which protect against the losses associated with volatile currency movements. Payments solutions specialists like Fexco provide expert skills on protecting client margins from currency fluctuations. Risk management tools ensure that the bottom line is protected but also provide clarity to ensure payments are made on time every time.
  • Reducing dependence on cheque and cash payments, to safer and more efficient electronic payments can also help businesses pay on time. Unfortunately the ‘cheque is in the post’ culture still exists and even after a cheque has been written, many days pass before funds can be accessed. Talk to your bank or payments provider about alternative (more efficient) payment methods and associated costs. The right payment method should also help you to minimize bank charges, encouraging faster payment to suppliers due to better-managed cashflow.

Innovative payment solutions

Fexco Corporate Payments has been delivering innovative payment solutions for over 20 years, creating value and increasing efficiency for all businesses from corporates & institutions to SMEs and personal customers.

If you need to deliver payments on time for your business, talk to our payments specialists today (Ireland: 1800 246 801 or UK: 0800 840 2887). You may also register online for a free account to avail of great exchange rates and professional payment advice.

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