• Monica Hovsepian, Financial Services lead at OpenText


• 25.10.2022 12:45 pm
#payments

Businesses are currently operating in a period of financial uncertainty. With a potential recession on the horizon, organisations are already starting to consider what they can do to minimise risk and reduce inefficiencies. 

According to recent research, more than 50% of businesses reported having experienced late payments in 2022. While this alone may not sound like a big deal, it’s creating a domino effect, which is limiting cash flow and stunting organisational growth. To make matters worse, despite large digital transformation efforts across all sectors aiming to reduce payment friction for customers, the average Days Sales Outstanding (DSO) is increasing. 

Research suggests that the average DSO is 67 days and 47% of businesses say their DSO has increased in the past 12 months. In addition to longer DSO, late payments reduce working capital, impact strategic planning, and delay potentially essential investment opportunities. 

Given the uncertainty we’re currently living in, organisations cannot afford to have unnecessary external factors impacting their financial success and growth. But what’s really causing these late payments? 

Friction points leading to late payments 

Late payments can stem from a wide array of issues, including management problems, tough market conditions, or even unpaid invoices by a customer. Unfortunately, manual, error-prone processes in Accounts Receivables (AR) continue to be the major culprit. Data shows that 61% of late payments are due to incorrect invoices or invoices arriving too late. 

This issue is being elongated by the fact that only 20% of credit departments have formalized credit and collections policies and of those, less than a third (32%) update their manual every two or three years. This is a document that includes clear, written guidelines setting out the terms and conditions for supplying goods on credit, customer qualification criteria, procedure for making collections, and steps to be taken in case of customer delinquency.

Streamlining the invoicing process

In many cases, invoicing still relies on overly manual processes, and as a result, organisations are struggling to answer even the basic questions around payments and AR. Simply matching payments to invoices can be a taxing task as the manual process often leads to confusion, meaning it’s not uncommon for invoices to go unpaid or unsettled. 

Organisations are also having to dedicate significant resources to address the problem. For example, research has found that 65% of medium-sized companies spend an average of 14 hours a week chasing late payments. 

How banks can help their corporate customers overcome these challenges

Automated payment methods and AR functions can significantly reduce this strain on resources, with 87% of organisations reporting faster processing, improved cash flow, and reduced late payments. 

Using automated AR reconciliation solutions can overcome significant customer pain points in areas such as, delivering a centralised view of cash flow and liquidity, and providing a single payments portal for both buyers and suppliers. The technology also has the potential to reduce risk through data driven insights into payment status and potential late payments and allows the user to more easily take advantage of volume and dynamic discounting schemes. 

While late payments can negatively impact any organisation, they are likely to be particularly harmful for small businesses. At the very least, they may stall growth, and in the worst-case scenario, they could set businesses on a path of financial decline that can end in insolvency. To get on the front foot at a time of great economic instability, organisations should start thinking about their options in this area before the tide turns.