Imagine if you were shopping and instead of paying for your items, you announced to the store clerk that you would be taking the items now and pay for them at a later date at your own convenience. You wouldn’t dream of casually walking out of a store without paying for items - so why would this type of behavior be acceptable when paying a small business supplier?
Late Payments Have Severe Consequences
For small and medium-sized business worldwide, more than one out of ten invoices is paid outside of payment terms. This adds up to almost a trillion dollars each year in late or unpaid payments - with many small and mid-sized businesses forced to write them off as bad debt. A key reason behind the issue is that many larger businesses are not cognizant of the consequences of paying a smaller supplier on time. They are simply not aware that they are wreaking financial devastation on small companies who are unable to absorb the costs of missed or delayed payments.
Current industry averages reflect significantly high numbers when it comes to late or missed payments to small and medium businesses. These numbers show that:
- 11 percent of all invoices issued by small and medium business are paid late.
- Small and medium-sized business must deal with delayed payments totaling 1.01 trillion dollars per year.
- 5 percent of all invoices issued by small and medium businesses are eventually written off as bad debt.
Cash flow is the lifeblood of a business. When we asked small and medium-sized businesses about the impact of late payments, 40 percent responded that late payments have a direct and negative influence on operations. In many cases, they stated that late payments force them to:
- Reduce future investments
- Cut staff pay
- Forgo paying Christmas bonuses
Not only that, but these same businesses must then deal with the costs related to pursuing overdue payments. On average, small and medium businesses spend 15 days a year and $6,000 in labor costs to chase down missed payments.
Combating the Issue of Late Payments
The current global economic climate necessitates a high level of productivity. Administrative tasks related to late or missed payment collection severely inhibit the productivity of small and mid-sized businesses. Therefore, it is imperative that these businesses put a stop to this issue by taking steps such as the following:
1. Ending the stigma around collecting payments
It should no longer be seen as embarrassing or impolite for a business to ask for money that is rightly owed. Businesses could even seek to turn communications of this nature into opportunities to provide customer service by offering to keep customer accounts current or assisting with new orders for products and services.
2. Recognizing the impact of late payments
Businesses of all sizes must recognize and appreciate the material impact that late or missed payments have on a small business. A delayed payment might mean that a bonus is not paid out, someone's pay is cut, or a missed investment in innovation.
3. Appreciating the value that small and medium businesses add to the economy
Small and medium-sized businesses are economic heroes. They create jobs and prosperity while knitting our communities together. We can help them on this worthwhile journey by treating them with the respect they deserve. This means prompt payment in full for services rendered.
Implementing Effective Collections Strategies
In order to begin implementing effective collections strategies, small and medium-sized businesses must have the right software for managing the collections process. An effective collections strategy includes large amounts of information, documentation, correspondence, and workflow processes. Typically this amount of information is far too much to manage manually or using ERP systems, which lack sufficient Accounts Receivable (A/R) functionality.
A/R and collections management (CM) software are able to bridge this gap in the collections process. They do this by helping businesses to keep track of their money through every step of the payment process. This ensures that businesses can respond to A/R information that could have otherwise fallen through the cracks. Small and mid-sized businesses can then quickly ascertain if their customers are paying on time.
Characteristics of A/R & CM Software
- Capable of providing a universal collections strategy with options that are customizable
- Performs automated email functions
- Includes an option for attaching invoices or statements to emails
- Has templates for collection correspondence letters
- Provides calendar and task list functions
- Includes an audit trail for the entire collections process
Modern accounts receivable and collections management software is able to integrate in a seamless manner with a company's existing ERP system, thus allowing a small business to easily create and implement a collections process. Not only that, but the software also consolidates the A/R data and automates workflows, enabling a business to effectively streamline collections activities.
Click here if you'd like to learn more about Collect-IT - modern A/R and collections management software.