New research from Formscan, provider of document solutions, reveals the punishing impact of late invoice payments on the UK’s SME sector.
The research says that 64 billion lies “trapped” in the economy, which could be freed up through better management of invoice payments (Accounts Receivable). The vast majority (82%) is frozen in the accounts of SMEs. As the credit crunch pushes up the price of business credit for many organisations, as well as limiting the availability of liquidity for some, financial managers face pressure to combat late payment over the coming year in a bid to release the trapped cash and improve working capital management.
The research published by Formscan is based on a highly conservative, achievable target for average invoice payment timing (Days Sales Outstanding, or DSO) of 45 days. Larger businesses (defined as over 250 employees, of which there were just over 8000 in 2006) have a DSO of just under 50 days; whereas average DSO for a Small to Medium-sized Enterprise (defined as between 11-249 employees, of which there were just over 200,000 in 2006) is close to 70 days. These figures serve as a reminder that late payment is not just a problem for the SME sector. It is the popular conception that large firms can afford to collect on time and pay late, but there have been many well-documented cases of essential suppliers being forced into business failure through poor payment history, to the extreme detriment of large firms buying their goods or services. For large firms, a healthy supply chain has become a prerequisite for stable business, Formscan says.
“Successful cash management is a careful balancing act between effective collection of outstanding invoices (Accounts Receivable) and controlled timing of suppliers invoice satisfaction (Accounts Payable),” says Chris Haden, managing director, Formscan. “In the UK, the reality is that legal pressure to make timely payments of invoices has been largely toothless. But in the current financial climate, there has never been more need to find other cash sources and late payment surely must be a priority.”
“What is required is a more systematic and automated approach to AR and AP, and a large part of the effectiveness of AR/AP workflows concerns the underlying documentary evidence, especially for smaller firms trying to improve their payment record from larger customers,” says Haden. “In our experience, many UK businesses have implemented systems that capture documents, as well as data, in the AP process. But surprisingly, there is much progress to be made in efficiently handling AR. In fact, due to the similarity of underlying document, data and workflow requirements, there is an obvious opportunity to combine AP and AR management processes. Key improvements likely to encourage more timely invoice payment are focused on providing documentary evidence of product or service quality, delivery, receipt and authorisation in the supply chain, simultaneously with invoice presentment.”