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In a perfect world, people would pay their invoices on time, every time. But we live in the real world, and delayed payments are an inconvenient reality for companies and finance teams.
Lengthy payment delays can be a huge pain point for companies. And in uncertain times, delayed payments become more frequent and the wait times even longer. For example, increases in late payments were reported all over the world following the onset of the Covid-19 pandemic.
These delayed or late payments set off a chain reaction within your organization and beyond. This creates cash flow problems and leads to other consequences, such as wasted resources, ruined relationships, and potential business failure. Let’s explore some of the reasons for these long payment delays and helpful tips on how to avoid them.
What is a payment delay?
A payment delay is the time between receiving a bill for goods or services and paying said bill. Usually, if the payment date is not indicated on the invoice, the deadline is 30 days from the receipt of the goods or the end of the services, although this could vary by industry, country, and company.
After this agreed-upon date, the payment is officially late or overdue. Unforeseen delays in payment can carry major consequences.
Consequences of delayed payments
Some of the consequences of late payments or long payment delays include:
Wasted time
Late payment reminders can be one of the most frustrating tasks for finance teams. They require bandwidth that could be put to better use.
Employees may spend countless working hours chasing down payments. In fact, the average UK SMB spends 1.5 days per month following up on unpaid invoices.
Wasted money
Sometimes, businesses have to resort to the legal system to go after clients’ unpaid invoices. Legal fees can be extremely expensive and the legal process is time consuming.
And on the client side, late fees can add up quickly, making the problem even worse.
Soured relationships
Chasing after clients for late payments is fun for no one. The delicate relationship between provider and client hangs in the balance of these awkward conversations.
Cash flow issues
If you are waiting longer than expected to receive payment, it is possible that you will not have enough cash reserves to cover your own expenses during this period. This can be particularly problematic for small companies with few clients.
Once you are short on cash, you are in big trouble. Not being able to pay suppliers, creditors, employees, or other operational costs can lead to business failure.
Business failure
While it sounds extreme, late payments can actually be one of the reasons behind a business failing.
Any combination of these consequences can be devastating for businesses.
What are the most common reasons for late payments?
Now let’s look at the reasons why a client might not pay an invoice on time.
Keep in mind that late payments are rarely due to malice or bad intentions. In most cases, it comes down to human error!
Here are some commonly reported reasons for delayed payments:
Lost invoice (or never received)
The client believes they have already paid
Payment is on the way
Unhappy with the goods or services delivered (or another dispute)
Cash flow issues (or need an extension)
Human error (typo, forgot, bad communication)
Luckily, there are a few simple ways to circumvent these problems and nip delayed payments in the bud.
Ways to avoid lengthy payment delays
Finance teams (usually the Financial Controller) have a responsibility to ensure that money is coming in and going out at a steady rate. To maintain this flow, companies should implement best practices for avoiding lengthy payment delays or late payments.
1. Terms and conditions
Your invoice payment policy should be clearly stated and easy for clients to find. Deadlines, payment schedules, late fees, and other rules related to invoicing must be explicit. Putting these policies firmly in place and communicating them clearly leaves no room for confusion.
Make sure the client understands these policies and provides written confirmation that they have read and agreed to them. You can refer to this should a dispute arise.
2. Know your customer
Some basic KYC steps will go a long way in avoiding trouble down the road. Before taking on a new client, take the time to research their previous provider history. For example, knowing if the client’s income source is volatile is a key piece of information that will help you budget for potentially long payment delays.
3. Automate processes
Automating reminders and payment notifications takes the burden off finance teams. Their time is then freed up to focus on their core missions and more urgent topics. It also eliminates the awkwardness surrounding tough conversations!
4. Create early payment incentives
Rather than focus on punishments for late payments, try creating incentives for early payments instead. Some companies opt to offer a discount on the bill, taking a small percentage off if the customer pays before the payment is officially due. This can strengthen relationships and increase trust between suppliers and customers.
5. Plan your budget around payment delays
Use budgeting tools and cash flow projections to your advantage. Having a rough idea of how long you can go before cash runs out is integral for planning around lengthy payment delays. Expect the unexpected and be conservative with your budget estimates, especially in uncertain economic conditions.
6. Responsive customer service
If a client reaches out to your customer service team, a quick response will show that you care. It will also help avoid small problems escalating into big ones. A small issue can quickly become a full-blown dispute if not taken care of in a timely and efficient manner.
Engaging with the client to understand their issues rather than just demanding payment will also increase customer loyalty and strengthen your relationship.
7. Open communication
Communication is key! With lines of communication fully open, customers will feel comfortable approaching you about potential issues before they reach a critical point. If you have early warnings about a long payment delay, you will have a chance to prepare and adjust.
Avoid payment delays with better tools
These seven tips can help you avoid late payments. Being organized on your side (clear policies and careful budgeting), knowing and communicating with your customers, automating processes, and staying on top of customer service requests will make all the difference.
With spend management tools (like Spendesk), finance teams have more visibility and insight to adjust how the business operates, prepares, and focuses on mitigating late payments. By doing so, companies maintain flexibility to track cash outflows. Tracking these outflows ensures better control over expenses, and can limit the volatility of inflows.
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