As the saying goes, revenue is vanity, profit is sanity but cash is king. A business can only be successful in the long term if there is sufficient cash generated from sales and other operations. Often invoices are not paid within the standard payment terms and some businesses adopt ‘delaying’ tactics such as the invoice being rejected initially to delay payment.
Despite this businesses need to pay their own creditors within their payment terms to preserve goodwill and avoid the risk that creditors may take enforcement action against them to recover debts such as issuing a statutory demand or obtaining a court judgement.
Impact on businesses
Late payments can affect businesses in three key ways:
1. The cash flow test of insolvency
One statutory definition of insolvency is that a company is unable to pay its debts as and when they fall due; inability to pay creditors as a result of late payments could lead to your business being wound up.
Research from the Federation of Small Businesses suggests that 50,000 small businesses close each year due to late payments despite the underlying business being profitable. The scale of the problem may worsen as a study by online business platform MarketFinance found that invoices in 2019 were paid 23 days late compared to 12 days late in 2018.
2. Future investment and growth plans
Late payments can prevent businesses from taking on new projects or investment as they do not have the funds available now and this will impact the future growth prospects of the business. One way to deal with this is to raise finance externally but banks may be less willing to lend after April this year when HMRC return to preferential status in insolvencies – another of my risks for businesses in 2020.
3. Your time
Late payments cost a business in terms of time spent chasing payments. Research from QuickBooks found that 56.4 million hours were spent chasing late or overdue payments which draws business owners’ attention away from critical business matters and also, perhaps most importantly, personal/family time.
What businesses can do
The priority should be to invoice promptly and have robust credit control procedures in place to follow up on late payments. Businesses may be entitled to obtain compensation for late payment at 8% interest on the debt. There are other legal remedies available to recover debts which can then lead to a winding up petition being issued against the customer.
Strong enforcement measures may damage goodwill with the customer and therefore an alternative approach for businesses could be to offer discounts to encourage early payments.
If underlying trade is profitable but late payments are creating cash flow issues then restructuring options such as Company Voluntary Arrangements could assist a business and early advice is often beneficial to keep a profitable business trading despite late payments.