Tackling late payment: An overdue consideration

IT IS AN emerging trend for both the government and the EU to shine a spotlight on the issue of late payment in business. Government comment and EU legislation are increasingly leaning towards enforcing sanctions on those who appear unwilling to pay on time. Of course, any support offered to businesses to improve cashflow is welcome. But are the offenders unwilling or unable? I believe that in order to effectively tackle late payments we should first understand the real root cause of the issue.

Paying late is a well-established cashflow strategy, isn’t it? Well, no. Most companies will, in line with corporate strategy, try to secure the longest terms possible from suppliers (60 days plus), but corporate procurement and finance functions generally try their best to stick to agreed terms.

Granted, there are the occasional late payments at year end, essentially window dressing to improve DPO (days payable outstanding). But the biggest barrier to on-time payments is process discipline. For this reason, I’m not convinced further legislation, or the threat of it, is a constructive approach.

A huge trend for companies over the past ten years has been to migrate to shared service and self-service ERP models such as Oracle or SAP, realising an opportunity to reduce back-office costs. But what can often be overlooked when implementing these models is ensuring a foundation of best practice policy and process discipline with suppliers beforehand. Without this, and with the loss of local-level clerks, local knowledge on supplier relationships all but disappears. So when an invoice doesn’t fit documented and rigid processes or policies, it automatically goes into dispute, which could be a cycle of 40 days or more.

A global food manufacturer offers a textbook example. Soon after implementing a centralised ERP system, suppliers’ payments complaints shot up and payment-on-time performance plummeted. The company had saved on back-office costs but lost the local shared knowledge factor. It first needed to extend payment terms, as those were below benchmark, and used the UK’s Better Payment Practice scheme as the carrot for suppliers to get on board. From there, all the company needed to do was communicate the golden rules to its supplier-base: this is how we do business, this is what we need from you to enable the process, and these are your key contacts and consequences if something does not comply.

Government-supported remedies are already available to companies grappling with late payments. Only last year, the prime minister challenged large companies to adopt supply chain financing as a way to fairly sustain improved working capital through payment structures. More time should be spent developing and promoting this wonderful tool because, yet again, effective implementation is being held back by poor process discipline. There are numerous examples of businesses that were unable to release the ROI for this tool simply because – during implementation – they found vendors took up to 25 days to navigate their process and land in systems.

Business discipline
So, before the government steps in, what factors should be considered by companies struggling to introduce a level of certainty into their processes and eradicate late payments?

Many overlook the fundamental business discipline element, ie educating suppliers and staff on the correct raising of purchase orders. If not done properly, the system doesn’t allow accounts payable to process and it will be paid late almost by default. Explaining process and policy to suppliers properly would be a huge step in the right direction. Unfortunately, many companies launch a shared services centre and send a single mail shot, yet fail to clarify the golden rules that suppliers must follow to enable on time payment.

But what happens to working capital if we all start paying on time? This is where it can get tricky because you are clearly going to have to fund paying from 60 to 30 days, for example. If your run rate is £20m, it will be cash that now can’t go into R&D or acquisitions. On the customer side, they may think, “Great – money is coming in”, but then they might see a decline in orders or value as their customers fund their own cashflow gap. This is another reason why gentle encouragement onto schemes like supply chain financing is infinitely more preferable than coercive legislation.

On the supply side, if your business is being put under pressure by late-paying customers, we advise taking a historical look at the problem. Simply gaining visibility into one-off instances as opposed to recurring problems is a start and the key is to engage customers quickly if the problem is a regular one. Ask them, “Am I doing something wrong?” – if so, adjust to fit in better with their processes.

If it is deliberate – look at their total value as your customer. Start deploying sanctions, move to pro-forma invoicing, or adjust credit limits but consider each action in context of total worth. If their leverage is greater than yours in the grand scheme of things, then you’re going to have to try to compromise, but always make sure they are aware of the cost to you of financing their business.

Jennifer Pinney is global practice director at REL Consultancy, the specialist working capital arm of The Hackett Group