The cost of being paid late
Overdue invoices are the bane of SME business owners. Late payments cause a shortfall in cash that can have bigger consequences for the company in the future. So much so that the cost of the late payment is far larger than the final amount due on the invoice itself.
So what is the true cost of being paid late? A recent study by Hitachi Capital has found that late payments end up costing all UK SMEs £51.5 billion. That eye-watering figure is so large that it is enough to affect the overall economy. Given that we are in the depths of a COVID19 enforced recession, it is now even more critical that all parts of the economy are working at full productivity.
SME businesses make up a large part of that economy so, here, we look at why late invoice payment costs add up so quickly. As a result, business owners can fully understand why late payments are so costly to their firm and gain the right motivation to minimise the number of overdue invoices they have. COVID19 has thrown up enough problems for businesses, like recruitment agencies, so it is vital to mitigate any of the possible problems that you can control.
Implications of Overdue Invoices
The following reasons all add up to show that an overdue invoice is about so much more than just the actual amount itself. In fact, these implications will only ever magnify and exacerbate the problem of a late payment — and so highlights why it is such an important problem for business owners to address.
– Inefficient cash flow and liquidity
When customers don’t pay their invoices on time, it means that businesses have a deficit of funds in their accounts. Cash is critical to the smooth running of a business. It allows companies to pay their own invoices and expenses on time, as well as improve their overall financial health. Poor liquidity reduces the options a business owner has available to them in terms of accessing funding, achieving better payment terms with a supplier or making investments that would help drive growth.
– Worse profit margins
While cash flow is an important business metric, so are profit margins. With outstanding invoices held on account, a company’s profit margins are immediately hit as expenses are still incurred. Improving profitability is another way that a company can drive growth and productivity, which is why it is so detrimental to a business’s abilities when customers don’t pay bills on time.
– Late payroll
For some businesses where positive cashflow becomes a very serious problem, the impact of outstanding invoices can affect a business’s ability to pay its employees. If companies have to pay their own employees late, that then affects those people’s abilities to pay their own living expenses. That has a knock-on effect again to those companies they purchased goods and services from, which is why late invoice payments can have such a massive effect on the overall economy. The impact is felt keenly by so many different supply chains caused by diminished demand. Additionally, it also affects who you can hire. High-quality employees are often not the cheapest, so with diminished funds business owners have less choice over who they can hire.
– Using personal savings
To cover costs, many SME owners will go into their own personal savings to make ends meet for their business. If invoices had been paid on time, that would not be the case as the company would have enough cash in its accounts to settle its own bills. Using personal savings is evidently not a sound business practice, especially as it simply kicks the problem down the road for the business owner — not to mention limit that owner’s personal choices in the future. Financial worries are likely to proliferate, which then has a detrimental effect on a person’s mental health and arguably their subsequent ability to run a business efficiently.
– Need to access outside funding
Companies that use up their cash account to pay expenses due, when overdue invoices haven’t been paid, may choose to access outside funding to help cover costs. As a result, the company is incurring more expense than necessary due to debt repayments. Profit margins are again hit as well as reducing a company’s ability to invest and grow with the reduced profits it does make.
Additionally, with diminished cash accounts and poor financial health, the company cannot access the funding options it may have had if all its invoices had been paid. Banks look at a company’s financial health when determining a company’s suitability for a loan. The less suitable it is, the less likely the bank is to make a loan. And, when a bank does make a loan, the worse the interest rate is that they offer. A company then has higher than necessary debt repayments.
Why you need to chase invoice payments — key takeaways
To summarize, late invoices materially impact a company’s choices and abilities to run as efficiently as it can. The reduced cash stops a firm’s productivity due to those reduced choices and as a result, minimises any growth. Growth is key to maximizing a firm’s profits, so overdue invoices do have the capability of magnifying a firm’s losses in the future. As a result, the exponential damage done to a firm is difficult to calculate — but one thing is for sure, it will be much more than the final amount due on your customer’s invoice.