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Of greater concern is the impact of late payments on the long-term health of the UK economy, which is estimated to have cost UK SMEs at least £51.5 billion in the last 12 months, but the true figure is likely to be much higher.

The new research from Hitachi Capital UK has determined the financial burden on the UK’s 5.6 million SMEs as a result of late paying customers and uncovered the extent to which an epidemic of late and unfair payments is hampering productivity and growth.

Over a quarter of SMEs (27%) have experienced a profit squeeze because of late payments, and 12% have had to defer staff pay, equating to an estimated 1.95m UK employees that are left empty-handed on payday.

With many SMEs already struggling to maintain liquidity, the research highlights the extent to which late paying customers represent a drain on resources. Around 40% of respondents have been forced to use their own money to address cash flow gaps in their business. The vast majority of these respondents (80%) have invested personal savings to keep their business afloat or operational.

Critically, the research exposed a need for SMEs to take measures to maintain cash flow over the course of the year to mitigate damage caused by unreliable customers. Nearly three quarters of SMEs (74%) have had a customer fail to pay during their agreed terms at least once during the last 12 months, and 34% of SMEs report customers using their position to delay or reduce payment.

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With 21% of SMEs also turning down a contract because a customer was known to be a bad payer or offering unfair payment terms, the use of external funding options is an increasing necessity to offer a safety net when business is stalling. Today’s research indicates that awareness of potential solutions such as invoice finance remain too low.

Robert Gordon, CEO of Hitachi Capital UK, said: “An imbalance of power between clients and suppliers, often driven by larger players abusing their position, has led to a widespread late payment culture that is damaging UK SMEs. As our research has shown, if we let this go unchecked, huge numbers of businesses will continue to experience cash flow pressures at a time of wider economic uncertainty.

“This has ramifications not only for SMEs, but for entire supply chains and a fair, competitive and supportive business environment is critical for the country’s wider economic success. It’s imperative that we not only acknowledge this issue and crack down on late payments, but also take practical steps to ensure businesses are given the required support and penalties are put in place for the worst offenders.”

The findings come amid a range of new Government measures – proposed by the previous Government but currently on hold – of tougher sanctions to address late payments, including greater powers for the Small Business Commissioner to enforce best practice and revisions to the Prompt Payment Code. Of those surveyed, over two-thirds of SMEs (68%) would support legislation making it illegal to miss a payment deadline, with over half of respondents (57%) spending nearly a day a week chasing outstanding invoices, suggesting that late payments are contributing to the productivity deficit within the UK economy.

In analysing the sector landscape, professional services was identified as one of the worst offenders, with 17% of SMEs identifying this grouping as a leading culprit for late payments.

The South East was the region with the highest proportion of SMEs reporting financial issues caused by late payments, representing 18% of the total number of responses, followed by Greater London at 16%.

Andy Dodd, Managing Director, Hitachi Capital Invoice Finance, added: “As one of the UK’s leading finance providers, we understand first-hand the impact that late payment can have. Many SMEs struggle to maintain liquidity and this remains an underlying threat to their personal finances and ultimately the survival of their businesses.

“Fortunately, there are a number of solutions available to small businesses. Firstly Invoice Finance which provides an immediate advance, normally of up to 85% of the invoice value, to provide instantaneous cashflow injection. Secondly, using a good credit control provider, perhaps aligned to Invoice Finance – it’s an area that frequently neglected, but should be front-of-mind amongst SMEs.”

According to a recent report, late payments are costing SMEs in the UK a total of £2 billion every year, with the entire sum of the missed payments totalling £14 billion[1]. Below Edwin Gabriëls, Consultant at Onguard, explains the intricacies of payments collection management, offering some tips for businesses.

With such a large amount owed to businesses, it would suggest that many organisations would benefit from improving their collection management strategy. Otherwise known as dunning, collection management is a vital process in credit control. It sees organisations follow set processes to chase for outstanding payments, making the chance of receiving payment more likely and given that 62% of invoices issued by UK SMEs in 2017 were paid late[2], it’s important that businesses get dunning right.

A sub-standard dunning strategy can cause organisations to run into a number of challenges when trying to obtain a late payment, ranging from customers not responding to reminders and evading payment for long periods of time to ineffective systems requiring a great deal of data mining before the first step can even be taken. These factors often make collecting overdue payments a lengthy and difficult process. A poorly executed dunning strategy can be time-consuming, with UK SMEs estimated to spend 130 hours a year chasing outstanding invoices[3], and can have a knock-on effect for the organisation as a whole, potentially damaging customer relations and inhibiting cash flow.

By creating an effective dunning strategy, which takes a structured approach to each stage of collection management, businesses are better placed to overcome these challenges.

By creating an effective dunning strategy, which takes a structured approach to each stage of collection management, businesses are better placed to overcome these challenges.The right strategy will enable credit control teams to determine factors such as how many times a customer is chased before legal proceedings are launched and what form of communication to take with the visible results of more efficient teams, reduced overdue payments and increased cash flow.

To develop the right dunning strategy for your organisation you should include the three stages and processes outlined below:

1. Structured Dunning

This stage should form the basis of every dunning strategy as the structured nature allows credit controllers to work to a predetermined framework to gain remuneration. For example, this could take the format of sending an initial reminder five days after an invoice becomes overdue. Then, if it remains unpaid, another reminder should be sent out at 15 days and a final reminder should be sent after 30 days. If payment still hasn’t been made after the three reminders, then legal action should be started. By following this process of chasing for payment, customers will come to the realisation that processes within your company are structured, meaning they can’t evade payment, leading to a reduction in overdue balances. Additionally, this format enables companies to pinpoint where issues occur during the process.

2. Dispute management and internal collaboration

Once structured dunning is in place, you can move on to implementing dispute management processes to look into issues customers have raised with invoices and processes. This stage requires some collaboration with other departments within your business to get to the heart of a customer’s problem and allow you to resolve the issue quickly as the sooner the dispute is resolved, the sooner you can get back to chasing for payment. By adding this step to your existing dunning strategy, you will see a reduction in overdue balances and an improvement in your cashflow as it doesn’t allow customer disputes to linger and for invoices to go unpaid for long periods of time.

3. External collaboration

Finally, by using the data you hold on the customer from both internal and external sources, you can determine how the customer wants to be addressed and the best ways in which to communicate. As customer engagement is becoming increasingly important, it is vital to use the tools at your disposal to create the correct communication at the right time. For example, if you have a long-lasting relationship with a customer it is crucial to address them in the right manner to avoid souring the relationship. This will help you avoid risks to cash flow and overdue balances posed by miscommunication.

For an effective strategy, businesses must first ensure they enforce structured dunning before integrating the other two elements as the strategy matures.

For human resources specialist t-groep, collaboration with other departments has become a key aspect of their dunning strategy. In fact, the entire company has access to the collection management solution as it is considered that those working closest to the customers have the best relationship with them. As such, these individuals are better placed to decide how to tackle the issue of outstanding invoices and find a way to ensure the amount is paid.

For an effective strategy, businesses must first ensure they enforce structured dunning before integrating the other two elements as the strategy matures. As a by-product of this three-tiered approach, the credit control department will gain a more centralised position within your organisation, rather than only becoming involved at the end of the relationship when an invoice is created, and payment is required.

With an established dunning process, it is possible to use information gained on customers’ payment habits and feed them into other processes within credit management, such as the order to cash chain. External data gathered through credit management can be used to determine whether customers are high or low risk, and decisions can be made as a result. For example, the knowledge that a customer regularly avoids making payments can inform decisions over whether to release an order to them. Additionally, this data can be used to segment customers into homogenous groups which can be used to determine aspects such as payment terms or discounts. This information could then be fed back into the dunning strategy to determine when chasing for payment begins.

It is important to remember that dunning certainly isn’t one-dimensional. In fact, with benefits including increasing cash flow, lowering overdue payments and improving customer relations, an entire organisation is likely to reap the rewards of an effective dunning strategy. It will also encourage credit controllers to be more focused on customer communication and address the disconnect between the way different departments communicate with customers. Although there isn’t a one-size-fits-all approach to dunning, by following this three-tiered framework, businesses will reduce the time spent on chasing customers for payment and achieve greater results.

[1] https://www.independent.co.uk/news/business/news/late-payments-uk-business-cost-sme-2-billion-a-year-bacs-payment-customers-a7846781.html

[2] https://smallbusiness.co.uk/late-payments-trend-get-worse-uk-smes-2542060/

[3] https://www.siemens.com/content/dam/webassetpool/mam/tag-siemens-com/smdb/financing/brochures/united-kingdom/sfs-uk-late-payment-report.pdf

Data released in Creditsafe’s Prompt Payment Formula 1 Standings, has revealed that, on average, Formula 1 teams pay 16% of their invoices late by an average of 10.5 DBT (days beyond the agreed payment terms), despite a combined turnover of over £3.6 billion.

Red Bull was found to be the worst offender, paying almost a third (31%) of its invoices to suppliers late by as many as 16 days beyond agreed terms. This is despite the team’s success, coming third in last season’s constructors’ standings, the exciting team rivalry between Daniel Ricciardo and Max Verstappen, and a turnover of close to £200 million.

In comparison, despite a disastrous 2017 season ending in ninth place and multiple engine failures affecting the team’s performance, McLaren was found to be the most prompt payer of the group, with 93% of its invoices paid on time. Of the 7% paid late, McLaren had a DBT of nine days.

Similarly, Torro Rosso, which came seventh in last season’s standings, was the second most prompt payer of the group, paying less than 10% (9.02%) of invoices late with a particularly low DBT of five days. While Ferrari joined Torro Rosso with the joint lowest DBT, 22% of its invoices were paid late, dragging it down the standings.

Led by Drivers’ Champion Lewis Hamilton, Mercedes topped the F1 Standings in 2017, but in terms of late payments, the team sat firmly in the middle of the table with 11% of invoices paid late and a slightly below average DBT of 11.

Rachel Mainwaring, COO, Creditsafe Group said: “In recent years we have seen the emergence of a late payment culture in the UK. Even in Formula 1, with the huge amount of money that is available to teams, late payment is rife and noticeably, none of the teams pay their invoices on time.

“Late payments can be a huge problem for businesses, whether dealing with the huge sums of money in F1, or smaller amounts of daily business expenses. It can leave companies with a potentially dangerous financial shortfall and all businesses, particularly those at the top of the podium should be fulfilling their obligations to suppliers.

“However, it is interesting to see the lower performing teams, such as McLaren and Torro Rosso, beating out competitors when it comes to prompt payment. There’s no doubt that if McLaren’s reliability last season had been as good as its prompt payment rate (97%), Fernando Alonso would have been a happier driver!”

Creditsafe’s Prompt Payment Formula 1 Standings

  Team % Invoices Paid on Time % Invoices Paid Late Number of Days Beyond Term (DBT) 2017 F1 Constructors’ Standings Annual Turnover
1 McLaren Formula 1 92.69% 7.31% 9 9 £    179,781,000.00
2 Scuderia Toro Rosso 90.98% 9.02% 5 7 £    131,976,503.84
3 Renault Sport Racing Ltd 89.04% 10.96% 12 6 £    119,671,000.00
4 Mercedes-Benz Grand Prix Ltd 88.91% 11.09% 11 1 £    289,421,000.00
5 Scuderia Ferrari 78.38% 21.62% 5 2 £  2,540,519,579.34
6 Williams Grand Prix Engineering Ltd 77.41% 22.59% 15 5 £    167,415,000.00
7 Aston Martin Red Bull Racing 69.23% 30.77% 16 3 £    197,949,000.00

Data not available for: Force India, Haas and Sauber.

(Source: Creditsafe Group)

Martin de Heus, Head of Business Development at Onguard tells Finance Monthly the situation may get worse before new methods such as segmentation drive improvement.

The issue of late payments is often seen as a major problem for small businesses only, with large corporates cast as the ‘villains’, wielding power by holding cash owed to their suppliers. There is some truth in this assumption. According to YouGov, late payments left UK SMEs £266 million out of pocket in 2016.

However, the business world is a symbiotic environment with few real heroes and villains. The impact of late payment on small businesses is often fast and dramatic – and so more visible. YouGov research also shows that 63% of medium-sized businesses receive late payments at least once a month, compared to 40% of small businesses. According to this study, the impact of late payments in this sector can lead to reduction of innovation spend and even more worryingly, the inability to pay salaries and ultimately, redundancies.

This may be because mid-range companies are most likely to be coping with outdated IT infrastructure with limited support. As a result, they are unable to automate the entire order to cash process and apply methods of segmentation for risk assessment and to ensure customers are invoiced and sent statements by their favoured and most effective method, albeit by post, email or even SMS. This form of segmentation is already considered best practice in the Netherlands and other European companies – and there are now signs of growing popularity in the UK.

But, if in reality, the late payment scourge affects all businesses, what about the belief that it’s

specifically a UK problem? In a further study conducted a few years ago, more than 62% invoices submitted by UK firms were paid late, compared with just 40% in other European countries – so this conjecture does hold some weight.

On top of this, YouGov reports that one in ten business owners believe that the problem has become worse since Brexit – with political and economic uncertainties making firms even more reluctant to part with their money.

So, what can businesses of any size do to manage their cashflow. Here are five things that any self-respecting business should put into place now to help get those payments in more quickly

Be clear about your payment terms

If you don’t make your payment terms obvious, then you can’t really blame the purchaser for hanging on for as long as they can before paying. Make sure your team the correct terms know too. Getting them into print will make the rule more definite and remove any doubt about what is expected and give your customers a consistent message.

Reward early payers

The stick rarely works as well as the carrot – as round after round of research has proved. Incentives for ‘good behaviour’ – that is paying on time can lead to better, feel-good relationships all round.

Stagger invoices

So many companies still batch process invoices once a month. True, it’s convenient, but sending out as soon as a product or service has been delivered could bring more satisfactory results. It also means you benefit from a constant flow of money.

Come down quickly on unpaid debts

Building relationships with your client’s accounts department can pay dividends. If a payment is late get in touch straight away to help create a sense of urgency. If the two departments are on good terms nobody will want to jeopardise this and the client will want to help.

Use segmentation techniques to prioritise and minimise risk

These methods are already strong in many B2C environments where payment methods have multiplied over the past few years. Segmentation can be used to define how statements and invoices are sent and the type of debtor you are dealing with. To give a simple example – in most cases it would be unproductive to send an octogenarian a statement via social media, yet this route could be highly effective when communicating with twenty-year-olds.

Now segmentation is being used increasingly by B2B companies too. Not only can it help in choosing the most effective way of communicating with the company, but it can also help companies pinpoint the types of customers most likely not to pay on time. With this knowledge, accounts departments are aware of the risks and can focus resources on collecting these payments rather than being heavy-handed with all customers including those who always meet the deadline.

Invest in the right tools

The main barriers to automated order to cash and increasingly sophisticated segmentation are out-of-date systems or, worse still, clunky spreadsheets. Credit management software which streamlines and automates the entire order to cash process are becoming used increasingly to solve the late payment challenge, saving time and building better customer relationships. They best integrate with existing ERM and are highly configurable enabling segmentation and other data analysis for the most efficient collection of money owed.

The late payment culture knows no borders. The proportion of UK invoices being paid late - and the amount of time taken to settle them by EU and US firms - has risen dramatically between 2016 and 2017.

Findings from business finance company MarketInvoice reveal that 73% of invoices sent by UK businesses to EU firms were paid late, up from 40.4% in 2016. Across the Atlantic, the number of invoices paid late by business in the US increased from 45.7% in 2016 to 71% in 2017.

Tellingly, the number of days taken by EU firms to settle invoices (beyond payment terms) has soared 30-fold between 2016 and 2017, increasing from just 0.3 days to 9.1 days. Similarly, US firms are also taking longer to settle their bills (beyond payment terms), up from 7.1 days (in 2016) to 19.5 days in 2017.

German firms were notable late-payers. They took 28 days (the longest all of countries surveyed) on average to settle bills to UK firms. Interestingly, in 2016 they settled their bills 0.5 days early. Also, the proportion of invoices paid late has almost doubled from 38.3% in 2016 to 62.8% in 2017. French firms took 26 days (compared to 6.1 days in 2016) to pay their bills and businesses in Ireland took 13 days (compared to paying 0.1 days early in 2016).

It’s not only UK exporters that are suffering. UK businesses operating at home were also hindered by late payments. Businesses took an additional 18.4 days to pay their invoices in 2017, compared to 5.9 days in 2016. Also, the proportion of invoices paid late increased from 62.3% to 66% (2016 vs 2017).

The research examined 80,000 invoices issued by UK businesses sent to 93 countries. Overall, 62% of invoices issued by UK SMEs in 2017 (worth over £21b) were paid late, up from 60% in 2016. The average value of these invoices was £51,826 and three in ten invoices paid late took longer than two weeks from the agreed date to settle, with some taking almost 6 months to be paid.

Bilal Mahmood, MarketInvoice spokesperson commented: “UK exporters are being squeezed globally as more of their invoices are being paid late and taking longer to be settled. Businesses respect long payment terms, but late payments are unacceptable.”

“The new trading environment in 2017, with Brexit negotiations on-going in the backdrop of global economic uncertainty, could have caused some consternation amongst late-paying firms around the world. This is not an excuse to not honour their payment terms.”

“UK businesses need to understand what measures they can take to reduce the risk. These include making T’s & C’s clear from the outset, chasing payments down and enforcing the right to claim compensation from late payments.”

(Source: MarketInvoice)

Late payments are an even bigger challenge for those medium-sized companies, with 94% of businesses employing over 50 people reporting that the issue is causing cashflow problems for them. This is according to new figures from Ultimate Finance.

In partnership with BDRC Continental, Ultimate Finance conducted research into the impact of late payments on the SME sector.

Other stats to be revealed by the research include:

Late payments within the sector are an increasingly public issue, with the main political parties vowing to stamp out the problem with legislation such as late payment reporting.

Ultimate Finance however, say that this sort of legislation can be incredibly divisive, and recognise that businesses of all sizes have their own cashflow issues. The company is now calling for the business community to come together and find its own solution.

Anthony Persse, Director of Strategy at Ultimate Finance commented: “We know that late payments can have a huge impact on small businesses. It is without a doubt, one of the biggest challenges faced by UK companies. However, there is a deep misconception that it is an exclusively small business issue which is simply untrue.

“This is leading to rules such as late payment reporting, which is creating an ‘us and them’ situation, when we should be seeking a workable long term solution. This is not just a case of the bigger boys picking on the smaller guys; cashflow and supply chain management affects every organisation, and should be tackled by the community coming together to support one another.”

The impact of government intervention has also been questioned by SMEs themselves. In research by BACS, 38% of small business owners questioned were unconvinced legislation would be helpful.

Ultimate Finance, which works with thousands of SMEs across the UK, believes that the business community needs to look at the way cashflow challenges affect companies of every size, and create an initiative or code of conduct that supports businesses holistically.

“We have taken a look at the numbers,” Persse says. “Many SMEs have significant late payment debt and it’s clear that something must be done. But current methods to help aren’t doing the job; just look at the bank referral scheme which is being evaluated for effectiveness.

“The issue is that politicians keep coming up with one-size fits all ideas and trying to dictate to businesses. Both SMEs and corporates are full of intelligent people who understand the challenges better than anyone.

They should be the ones to create the solution, with support from government and the wider industry – not the other way around.”

(Source: Ultimate Finance)

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