Intermediary payments and giving businesses a cash flow safety net

Intermediary payments and giving businesses a cash flow safety net

Matthew Abbott, Head of Solutions Consulting EMEA SMB, SAP Concur talks about the ongoing problem of late payments and investigates some potential tech-led solutions.

Intermediary payments and giving businesses a cash flow safety net
Matthew Abbott, Head of Solutions Consulting EMEA SMB, SAP Concur

Another day, another report of big businesses being named and shamed for failing to pay their invoices on time. In July, it was the turn of eighteen big businesses including Screwfix, Severfield and Galliford Try to be removed from the Prompt Payment Code and publicly named.

Without a huge sea-change in business culture – or a considerable tightening of the regulation around late payments – this looks to be a problem that will be ongoing, especially for the small business community. So, what is needed now is a solution that can benefit all in a supply chain to maintain cash flow and ensure these businesses don’t find themselves consistently being paid late and subsequently paying their suppliers even later still.

With more advanced invoice systems, there are partner applications that can take on the burden of strict payment terms, allowing the original payee to retain a steady cash flow while paying promptly.

A recurring problem

An invoice represents the apotheosis of a commercial transaction. It means the supplier has met its part of a deal and formally requests the customer to perform the agreed consideration – normally a payment in money. The premise is simple and yet businesses are constantly failing to pay their invoices on time.

In recent months, a number of leading FTSE companies – as well as the UK’s largest multi-channel retailer of trade tools, Screwfix – have  been suspended from the government’s Prompt Payment Code, after they were found to take longer than 60 days to pay their suppliers. Earlier this year, in April, Interserve and Persimmon Homes also faced suspensions. Late payments are clearly a recurring problem, and the suspensions implemented by the Chartered Institute of Credit Management (CICM) are not deterrent enough. For many businesses involved, they are simply too big to be negatively affected.

The impact of late payment

Inefficient invoicing can onset an array of problems for businesses, and in the worst case, even cause a company to collapse. Delayed payments are particularly damaging because when a company pays their suppliers late, unnecessary costs can incur to those suppliers, putting a real strain on their cash flow.

For smaller businesses involved in supply chains with larger businesses that are dragging their payments out as long as possible this can be especially damaging. If the supplier can’t keep its head above water while waiting for payments, this will ultimately affect the supply chain, threatening the business. Furthermore, late payments can cause a knock-on effect when, for example, the supplier waiting payment is unable to pay someone themselves.

Or, when a supplier suspects foul play and holds onto funds in order to meet their own obligations, this can cause a backlog. This held money for one would be best spent on investing in new technology or used to hire staff and ultimately grow their businesses.

As well as hindering cash flow, late payments also hinder productivity. For the suppliers in particular who are waiting for payments, inefficient invoicing is hugely frustrating as they are forced to spend time and energy chasing what they are owed.

In many cases, major enterprise-sized businesses are supplied by smaller businesses, so any action on the enterprise’s behalf – such as not paying on time – can have a major impact on the supply chain. It is the smaller companies who suffer, not the large corporations. Sometimes the supply chain is so badly affected it is a catalyst for the company’s downfall.

A new wave of technology

In today’s ever-increasing interconnected world, where the relationship between people, processes and information is changing rapidly, it comes as no surprise that new technologies have a crucial role to play in meeting invoicing challenges.

For one, paper invoicing is completely outdated. It’s inefficient and with paper invoicing there is greater room for mistakes. Businesses must take full advantage of automated invoicing systems and further embrace partner applications such as intermediary payment services, which is a viable and secure way to sync up disjointed payment terms if they are to truly smooth out the payment process.

Intermediary payments are of particular interest to small suppliers who have been let down by big enterprises, because when times are uncertain, they provide a margin of safety. The buffer of the intermediary means suppliers are granted a loan for a small fee to allow them to pay what they owe in their own supply chain, allowing them to maintain the flow of goods and services as they await on overdue payment.

It is up to businesses to invest in these modern financial technologies. A range of advanced tools exist that use machine learning to help finance teams monitor and analyse cash flow, invoices, expenses and travel, then observe out-of-policy activities, set budgetary expectations and negotiate late payments. It is an investment that can quickly pay for itself in insights, time saved and cold hard savings.

Taking an ecosystem approach to finance

The current digital revolution is empowering us to work faster, smarter and more efficiently. Using advanced technology means companies can take an ecosystem approach to finance whereby anything finance related can be seen side by side and working in close harmony – this helps businesses maintain a frictionless payment cycle.

Advanced technology means the way we process invoices is becoming more efficient. Large amounts of invoices can be processed with minimal mistakes; automation ensures that the risk of errors and duplication are greatly reduced, and technology can also provide vital insights into spend and cash flow which increases cash visibility. Intermediary payments fit in seamlessly with all these developing technologies and in particular ensure a constant cash flow to help maintain that all important supply chain. Many technology companies involved in processes such as invoicing often have an ecosystem of partner applications that can be bolted-on to the core technology, alleviating specific issues such as the need for intermediary payments in the event of a substantial issue beginning to surface. Ensuring that the maximum value from these ecosystems is being used should be a core focus, specifically for smaller businesses.

Utilising invoicing and intermediary payment technology can solve multiple finance problems, both eliminating any nasty surprises, and allowing for greater strategic planning. While action against late payers are still ineffectual, small suppliers in particular should take advantage of these technologies so they don’t find themselves lacking sufficient funds when big enterprises exploit them again.

Resources & Whitepapers

How to optimise your compliance lifecycle

How to optimise your compliance lifecycle

12m
The new rules of accounting

The new rules of accounting

1y
5 ways internal productivity can boost your profitability

5 ways internal productivity can boost your profitability

1y
Crushing the Four Barriers to Growth

Crushing the Four Barriers to Growth

1y