Small and medium sized businesses are an integral part of the UK economy, making up 47% of all private sector turnover, with a total annual turnover of £1.8 million. However, poor accounts payable practices by bigger businesses and the increase of late payments are putting this essential ecosystem at risk.

The rise of 90-day payment terms imposed by larger businesses in particular, has meant that smaller businesses – those with an annual turnover of less than £1m – now report having to wait an average of 72 days for an invoice to be paid.

The statistics surrounding poor payment practices are alarming, and should prompt businesses to rethink their accounts payable practices. Not only for the impact on their own supply chain but also for the impact on the overall economy. As many as one in three payments to small businesses are now made late, according to The Federation of Small Businesses, while small businesses are thought to be owed £26bn in late payments. 37% of businesses have experienced cash flow difficulties, while 20% of organisations have suffered from a reduction in profit growth.

And this is not just a problem of smaller businesses being forced to sit back and wait for payments to come in the door, with a recent survey finding that 23% of SMEs in the UK have been put at risk of closure by late payments, while insolvency trade body R3 said that late payment is a major factor in one in five corporate insolvencies.

While this is a problem within itself, it is particularly problematic for those small businesses with poor, little, or no financial controls or monitoring processes, which can easily find themselves buried in paperwork and struggling to keep track of late payments.

Larger businesses can also be exposed if they do not have systems and processes in place that ensure they process transactions on a timely basis and have full visibility and control over their current and longer term cash flow requirements.

Sage

For any business, whether small, medium or large, the availability of cash is all about working capital management, and a key element of this is getting customers to pay on time, or keeping track of unpaid invoices when they don’t.

Getting customers to pay in good time, all relies on back office processes that allow businesses to gain visibility and control of billing processes.

To give you an example of how late payments can lead to costs racking up for a smaller business, if a company turns over £1.2 million a year and sales are an even £100,000 per month, with 30-day payment terms, if everyone pays in 30 days a business needs to invest £100,000 in working capital.

However, if customers pay 15 days late – 45 days from invoice – the business needs another £50,000 of investment. That’s an extra 50% investment in capital for a delay of just 15 days.

This becomes even more significant in circumstances when supplier are asked to wait 90 days for payment – which is becoming increasingly common – as working capital investment rises to £300,000 during this time period.

This extra investment in working capital cannot help the business case for innovation in small business and must harm both the supply chain and the national economy.

Businesses are putting themselves at serious risk if they combine poor billing practices with weak accounts payable processes. Customer payment terms do not start until the customer is invoiced, so a delay in invoicing will further increase working capital requirements. Where supplier invoice processing is poor there is often a lack of visibility of future supplier payment requirements.

The perfect storm of a significant supplier payment demand arriving, while a business is short of cash waiting for customer money to come in, can lead to a business being put into administration.

The consequences of being out of control and struggling to process supplier invoices before their due date are far more severe than just the disruption caused by the number of calls received from suppliers chasing payments. It is highly likely that accounts will be inaccurate, which can contribute to poor decision making.

An efficient supplier invoice processing system which ensures that supplier invoices are processed in a timely manner are equally appropriate for all businesses, both large and small.

The solution for each may lay in introducing some automation into the accounts payable process. The benefits of automating processes include increased productivity, accuracy and consistency. A wide range of automated accounts payable software is available to help different sizes of business which can reap all these advantages. These start from simple solutions based on electronic document management which digitise the process, through to end to end solutions that automatically capture invoices and workflow them through to the ledgers.

Ensuring that accounts payable processes are working effectively is an essential element of ensuring the UK’s vital SME community continues to not only survive, but innovate and grow.

Larger businesses which insist on a culture of late payments, may want to consider what will happen if those smaller businesses one day don’t exist.