Could technology reduce the impact of late payments?

Sponsored by FA Simms.

Poor payment practices have become ingrained in the culture at many organisations. And it’s a major problem. Thousands of SMEs are suffering from severe cash flow issues and financial hardship as a result. Research by the FSB shows that 52 per cent of small businesses experienced late payments in 2022, with 24 per cent reporting an increase in late payments in the same year.

With profit margins already razor-thin for many businesses, these consistent late payments can quickly put them in a perilous financial position. Even a single late payment can be enough to push a business into insolvency if it lacks the cash reserves to cover shortfalls, causing unnecessary stress and financial burden on business owners.

With late payments being seen as normal, there’s little incentive for change. So what can your SME clients do to withstand this systemic issue?

Technology as a solution

Late payments create unnecessary friction that prevents businesses from reaching their full potential. The impact goes far beyond just the cost of the unpaid invoice, creating a ripple effect of productivity and financial issues.

Employees can spend countless hours following up on late invoices rather than focusing on core business activities. This lost time could be spent on business development, innovation or providing better customer service.

Technology has the potential to significantly reduce the overall impact of late payments on businesses.

Automated invoicing and reminders

Cloud accounting platforms, such as Xero, allow businesses to automatically send invoices and payment reminders on a schedule. They allow companies to generate invoices instantly, track invoice status and payments in real-time, and integrate invoices into any existing internal accounting systems.

Businesses can send invoices electronically via email. This eliminates the delays and costs associated with printing and posting paper invoices. Recipients can receive, approve and pay invoices much quicker without manual data entry.

For larger organisations, cloud accounting platforms also enable the easy export of invoice details into different formats for sharing across various systems. This automation helps minimise human errors and speed up order-to-cash cycles.

With better analytics and cash flow reporting, and real-time visibility over outstanding invoices, this technology provides significant time and cost savings compared to traditional paper-based invoicing.

Digital payment processing

The rise of digital payments offers several advantages for businesses struggling to collect outstanding invoices. Digital payments allow for faster settlement times compared to cheques or cash. Most digital transactions clear in hours rather than days, enabling businesses to access funds sooner.

Digital payments also enable easier reconciliation since transactions are recorded electronically. Businesses can view payment details and match invoices instantly rather than tracking down physical receipts. This saves significant time and effort.

Mobile payment options add more flexibility for businesses to accept customer payments anytime, anywhere. This can be particularly helpful for tradespeople as customers can pay instantly via a mobile device, instead of by BACS, cash or cheque on receipt of an invoice. Mobile card readers also integrate with cloud accounting platforms for efficient processing.

A cultural shift is needed

While technology can help, much of it has been available for some time and the problem persists – a wider cultural shift is needed to truly tackle late payments. Prompt payment by customers must become ingrained as a good business practice, not an afterthought.

The government is taking some measures to address late payment culture. In the Prompt Payment and Cash Flow Review 2023, it committed to 30-day payment terms in contracts across the public supply chain. With this measure it aims to improve the payment culture in the public sector and set a standard for private companies to follow.

It has also promised to work with sector associations to increase messaging around the issue, and to embed late payments into the environmental, social and governance (ESG) agenda through the Financial Conduct Authority's work with the Department for Business and Trade and the Small Business Commissioner. Strengthening of the Prompt Payment Code is also on the horizon. 

Outside of the public sector, the FSB is a leading voice on the issue. As well as lobbying the Government, they’ve worked with lawyers to recover £3 million in late payments since June 2020.

But there also needs to be a shift in the culture of small businesses themselves. Businesses should establish clear credit terms and policies at the outset, and filter out high-risk customers.

Moving to full or part payment up front or via direct debit may also improve the proportion of payments received on time. Some business leaders may feel like this is taking liberties, as they’re asking for payment before the service is completed. However, it does set clear expectations and, if they’re delivering an outstanding customer service from the outset, this is less likely to cause any friction.

Having these robust systems in place makes businesses less vulnerable to insolvency risk from late-paying customers. Combining this cultural shift with technology gives them significantly more potential of taking control over cash flow being impacted by late payments.

Richard Simms is Managing Director of FA Simms.