According to a study released by CRIBIS D&B, nearly half of all payments in the United States and Europe arrive after the deadline. What’s behind all the delays? What are the consequences of late payments? And what solutions need to be implemented to solve this major challenge? Let the Fluxym experts guide you every step of the way!
I. Payment delays: a notorious pain point with many causes
Geopolitical events
At a time when the global economy is increasingly being shaped by geopolitical events, companies have suffered from the fallout of rising inflation and interest rates in recent years.
Looking to plan for the unexpected amid such uncertainty, companies are pulling out all the stops to tightly control cash flow and build up reserves. Their main tactics include renegotiating and extending payment periods, or sometimes even ignoring deadlines.
Since amassing cash reserves also entails freezing investments, automation projects are either shelved or postponed. This indirectly leads to late payments.
Lack of automation
There are several reasons why extended payment periods are a direct product of accounting and finance departments not using automation:
- Manual processes for invoice collection and approval are complicated and time-consuming, causing considerable delays in invoice processing time.
- Data entry is subject to human error (invoice details, amounts, dates, etc.) and can lead to payment approval and processing delays.
- No invoice status data: It can be hard to track the status of invoices when they are not automated. Without any alerts or notifications, it’s easy for companies to lose track of due dates.
- No centralized review and approval: The invoice review and approval process in many companies can involve several different departments and management levels. If roles and responsibilities aren’t clearly defined, it can lead to delayed replies, misunderstandings and bottlenecks.
Poor data management
- Obsolescence and quality: It is estimated that 30% of the supplier data that is required to settle invoices (e.g., bank details) becomes obsolete each year. This does not even include missing, incomplete, wrong or duplicate information. These are just some of the culprits that delay processing and extend payment periods.
- Required fields: Moreover, invoices submitted to customers must contain mandatory information. If these fields are missing or left blank, the customer may decline the invoice. It goes without saying that the time spent adding and correcting these fields, plus the back and forth between customer and supplier, delay payments even more.
No central invoice reception
“Decentralized” reception is when supplier invoices are sent to different people or departments at a customer’s company. Payment delays are caused internally when they forget, lose, don’t forward or fail to inform.
No contract or general terms of sale
Contracts and general terms of sale stipulate standard payment rules that establish a clear and consistent arrangement between the parties. Not having these documents can lead to misunderstandings and disagreements about payment deadlines, thereby causing delays.
In addition, they specify preset terms that simplify the company’s internal approval process. If they are not signed, every new transaction may require multiple approvals leading to further payment delays.
II. The consequences of missed payment deadlines
There is a wide range of reasons for extending payment periods. Regardless of whether they are intentional, they have serious consequences for both suppliers and customers that are “bad payers.”
For suppliers: the creditors
Missed payment deadlines are a major risk for suppliers, especially small enterprises and independent contractors, who report that it affects their cash flow to such a serious or critical degree that it can even lead to bankruptcy. It is also estimated that 25% of all registered business failures in Europe are linked to non-payment. Additional consequences include:
- The domino effect: All too often, companies that are victims of late payments find themselves unable to meet their own payment deadlines with suppliers. The European Commission confirms this, saying that 70% of businesses report dealing with this issue.
- Business slowdowns: The amount of financial resources being blocked to offset working capital requirements is forcing a vast majority of companies (89% according to this study) to reconsider, postpone or cancel planned investments and hiring initiatives that are vital for their growth and longevity.
- Quality and continuity of goods and services: In an effort to cut costs, suppliers may be forced to sacrifice the quality of products and services, or even reduce their workforce. This can harm their ability to meet customer demand.
- Outstanding payment management: Following up on payments, sending reminders and collection processes can cost a lot of time and money.
For customers: the debtors
Far-reaching financial consequences and greatly disrupted cash flow
In order to prevent late payments and discourage customers from ignoring legally mandated due dates, suppliers have the right to add late fees for “bad payers” – assuming the parties had signed a contract stipulating these terms.
At the same time, fines can be added depending on current regulations.
Moreover, not paying on time can impact a company’s credit score, making it harder and more expensive to obtain external capital.
These financial consequences can directly affect corporate cash flow and WCR and hamper their investment, hiring and growth strategies.
Damaged supplier relations
Aside from these financial penalties, the names of organizations that pay late are publicly listed on the DGCCRF website (French Ministry of the Economy, Finance, and Industrial and Digital Sovereignty). Their reputation is damaged, and they lose credibility in the eyes of suppliers, customers and partners.
Relations between the debtor company and its suppliers can then begin to break down, thereby affecting business in a number of ways:
- Supply issues: Suppliers can start restricting deliveries or putting them on hold for companies that do not meet the required payment deadlines. This can be especially problematic when the debtor company is dependent on specific strategic suppliers. It can even impact its supply chain and production capacity.
- Loss of commercial advantages: When suppliers lose trust, they may reconsider any commercial advantages they had granted the company. For example, they can demand shorter payment periods, deny future discounts and restrict payment terms.
- Worse financial performance: Suppliers might react to late payments by refusing to provide the company with strategic innovations, which can damage its performance, growth and reputation.
III. Reducing payment delays with a Procure-to-Pay solution and e-invoicing
As explained above, no one benefits from late payments. This is why it’s essential to install a Procure-to-Pay (P2P) solution that solves this serious problem with a variety of drivers:
- Set and manage spending commitments: The invoicing process cannot be automated unless there are purchase orders to allow for automated reconciliation. The accounting team has to manually process what is then considered an “exception.” A thorough control and approval procedure must be followed with the person who made the purchase, mainly to ensure that there was no attempt to commit fraud. These extra steps can cause a payment to arrive past the due date. On the other hand, you can create spending commitments in P2P solutions at the start of the purchasing process and automatically link them to the invoices.
- Centralized invoice reception: Many Procure-to-Pay solutions include a dedicated portal where suppliers can directly upload their invoices, which are then collected by the customer’s accounting or finance teams. No more wasting time emailing or mailing documents, not to mention the time it takes to locate any misplaced documents.
- End-to-end traceability and visibility: You can use P2P solutions to digitize and automate your entire invoicing process, which serves two purposes. One, it eliminates the manual tasks and human error that routinely delay payments.
Two, these solutions offer full traceability, from the time the purchase is made to when an invoice payment order is issued. This allows your accounting teams to view each invoice’s status in real time so they can prioritize approvals and payments.
- KPI implementation and tracking: This is a key component of process control and approval. In the blink of an eye, companies can detect any bottlenecks in the organization to take appropriate actions to resolve them. To prevent payment delays, you must routinely check three different KPIs: accounts payable delays, processing delays and the on-time invoice payment rate. Even though these metrics can be calculated manually, automated solutions offer the highest accuracy and reliability.
- Integration with accounting systems and ERPs to automatically forward payment orders and ensure that due dates are met.
In sum, implementing a Procure-to-Pay solution speeds up the process and provides undeniable benefits by automating the invoice processing and digitization system.
For example, the P2P solution provider Basware says its customers process 89% of their invoices without any manual tasks, which gives 93% of them the ability to pay before the due date.
Our customer Radiall says:
Switching to electronic invoicing significantly reduced the number of discrepancies we have to manage. Our average supplier invoice processing time dropped from 7 to 4 days.”
Christiane Rebaud
Accounts payable SSC manager
Your employees also have to be informed about and trained in the stakes and risks of late payments because they are the people in your company who ensure payment deadlines are met. This can be done through workshops, case study analyses or trainings in specialized software solutions.
Unmanaged payment deadlines can become a serious headache for your accounting and finance departments, leading to outcomes that can harm your organization.
Automated Procure-to-Pay process solutions are now one of the best ways to solve this major challenge. However, it’s not always easy to implement this type of project, plus it can cause your organization serious disruptions that impact your teams and processes. Backed by over 20 years of experience, Fluxym’s experts are here to guide you every step of the way to ensure an effective and seamless transition.