The Cost of Late Payments

The cardinal rule. Cash Is King.

Perhaps this is the reason that large corporations are paying their small business suppliers after 30 days. However, accumulation of unpaid invoices can have a significant impact on cashflow and financial health for small and medium-sized enterprises (SMEs).

As previously reported by the ABC, small businesses are losing up to $7 billion cashflow from late payments and these outstanding invoices create a “domino effect”.  It is probable that this flow-on indirectly affects more businesses than initially conceived.

The importance of cashflow

Small businesses who endure long wait times on their payments are proven to perform worse than their counterparts, according to a study conducted by Xero. When small businesses aren’t paid on time, not only is their ability to meet liabilities hindered, but the scope of expansion to their operations becomes limited.

Fundbox has conducted a survey of over 200 customers to better understand the impact of late payments, revealing the full implications of late invoices in the economy. The study found that over 20% of small businesses are restricted in their ability to invest and hire new talents, while some had to call off their large-scale marketing efforts.

Consulting firm Plum also confirms that 7.5% of all small business invoices ultimately have to be written off as bad debt, potentially putting small businesses in unexpected situations. In such an environment, it is imperative to have strong cashflows, as they afford greater protection against loan defaults, and improve potential for projects where a higher working capital is required.

The domino effect

Companies don’t often think about how payment terms affect other businesses. With a shortage of cash, businesses that rely on contractors or other services may be forced to extend their payment times, resulting in interest or late payment fees. These consequences also stem beyond liquidity concerns, as non-tangible assets such as trust and goodwill may also be impacted and affect a business’s long-term valuation. While this may occur to a relatively small degree, the main concern is the suffering of many business relationships.

Solutions

Ultimately, having strong and consistent cashflows give businesses a competitive edge, but also financial freedom and efficiency in making operational and investment decisions. Associations such as the Business Council of Australia have attempted to tackle the issue of inconsistent cashflows for small businesses by promoting solutions that encourage efficient payment times and uniform terms. These recommendations call for the use of electronic invoicing and processing as a solution, in addition compliance with voluntary payment codes.

One such solution is the LUCA e-invoicing platform, which assists compliance with the Australian Supplier Payment Code. With efficiency in mind, LUCA speeds up invoice times, reduces the need for manual processing and mitigates the potential of human error. LUCA also automatically projects future cashflows to help businesses understand their clients’ payment times and other influences their revenue. Including additional features, LUCA is free to use and seamlessly integrates with your existing accounting solutions.

LUCA is free and can be setup directly on https://luca.ledgerium.net/register.

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