There could be a solution to your firm’s late payment problem

As late payments persist and the culture of ‘buy now, pay later’ grows, apps can help you get paid.

Late payments can be a pain, and if widespread and persistent, they can even threaten a business’s survival. 

Smaller companies were owed £250,000 in outstanding invoices on average, according to a survey of SMEs conducted by alternative finance specialist Time Finance. It added that around a fifth of respondents said relationships with customers had been damaged by chasing up money owed. 

Not only that, but according to one of the world’s largest insurers, Allianz, operational costs as a proportion of turnover have hit their highest level since the 2008 and late payments continued to rise last year, with nearly a fifth of businesses worldwide reporting that typically they were paid after 90 days or more. 

As overheads creep up and credit becomes more expensive due to rising interest rates, taking steps to curb late payments is crucial, according to Bobby Lane, co-founder of Factotum.

Why an app might work for you

“I was incredibly cynical about these apps to begin with,” Lane says. “I used to think nothing beats having a relationship with clients and getting on the phone to them and speaking, but when you automate the process, it accelerates payment, and payments are made in a more timely fashion.”

It removes the personal element 

For many, the personal touch is a key to their offering, but in Lane’s experience, that should not perhaps extend to getting paid. 

“I don’t know why this is the case psychologically, but if you send an email with an invoice attached, we find a client will ignore it,” Lane says. “But if they get an automated email from a system with an invoice, for some reason they seem to take it really seriously and I’ve had a few panicked emails saying ‘We thought we’d paid it, we’re sorry!’” 

Real-time data 

Using apps such as payments management tools provide businesses with real-time visibility over their performance and allows them to see where they stand. 

“It gives you the discipline to make sure things are happening,” Lane explains. “In the pandemic, businesses became more interested in their cash flow, real-time information and forecasting. People became acutely aware of the cash available in their business and what they needed to survive. Managing your working capital and making sure cash is in the business is crucial, especially in periods of uncertainty.” 

A case where it’s worked…

Payments went from 60 days to 45 days

Lane cites one client who managed to reduce their debtor days by an average of 15 days, simply by better monitoring. 

“They were doing everything manually, including credit control and chasing invoices,” he explains. “When they introduced their payment management software, their collection period went from 60 days to 45. That’s just by putting in a process and a system that was monitoring things automatically and making sure those chasing emails were going out.” 

…and a case where it hasn’t

Lane also notes that another client attempted to introduce a payments management system, but didn’t execute it correctly. 

“It went badly,” he says. “They were trying to do their own bookkeeping, and it was one of those situations where they’d write up their books when they were trying to do their VAT return. You’ve got a bank account that’s not reconciled and invoices that are still showing as outstanding on the receivables ledger. Payments have come into the bank account that haven’t been checked off against the invoices and their system is sending our chasers for things that aren’t due.  

“That doesn’t look particularly good reputationally.”   

The drawbacks

Incomplete data  

As with so many systems, the quality of data fed into it is crucial to its function.  

“Your systems have to be up to date,” says Lane. “It can get a bit embarrassing if you’re not reconciling your bank account and your books. It can mean your payment processing software is sending out emails to people saying ‘Can you please pay your invoice’ and you’re getting responses saying it was paid weeks ago. So you’ve got to make sure your software is updated and linked up properly to the rest of your system.” 

Spam filters  

“Company spam filters can be quite strong,” says Andy Murray FMAAT, finance manager at Galson Sciences. “A lot of government agencies, which make up a lot of our clients, work like that, and filter each new domain they get emailing in, so we have to be careful clients check their junk, because if that continues, they won’t receive any chase emails and we won’t get paid.”

Taking payment management to the next level 

Customisable, interactive payments management 

Examining that data in more depth and with greater flexibility is the natural next step for payment management tools. 

Most standard tools offer a dashboard and automated communications at set intervals, but additional tools such as Microsoft’s PowerBI enable users to interrogate their data in much greater detail and engage in various forecasting activities and modelling. 

“From a dashboard and visibility point of view, more interactive data is always desirable,” says Murray.

“That allows you to manage your cash more closely and go through ‘what if’ scenarios, so you can be confident you have enough cash in your business to meet your own obligations. 

“If, for example, you’re a mergers and acquisitions business acquiring companies, and you’re looking at making a purchase, you can interrogate the trends there and stress test whether it would work and you have enough coming in to absorb it.”   

Greater automation 

Open Banking APIs are set to play an increasing role in late payment. They can help gauge the risk that clients and/or potential clients will pay late or not at all, as well as facilitate automatic payments between trusted parties. APIs provided by fintech providers that can be securely used by online merchants in apps and websites simplify the management of sending, authorising and clearing payments. 

“Everything can be one automated process and fully integrated,” explains Lane.  

“The real-time data that these apps create and are at business’ fingertips is so far ahead of where it was even two or three years ago, and it’s made life easier for businesses to see where they stand at any point in time. That will only continue.” 

He cites AI as a clear candidate for inclusion in the process, particularly given its rapid iteration and progress in a short period of time. 

“We’ve seen the recent developments in AI and how it can predict certain trends, that will be integrated more with that real-time information on accounting.  

“There is talk that there may be changes to the accounting regulations, which will mean in future that small companies won’t be able to file abbreviated or filleted accounts.  

Instead, they will have to include their turnover and profits and deeper detail on Companies House. This, Lane says, will change the dynamic. 

“That will mean much greater detail on the small companies you’re trading with will be available to you, and you’ll have a clearer picture on how they’re doing, the size of it, and so on.” 

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.