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Blog - Balance Sheet

How to decide when to act on late payers

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Over the years I've found three realities about late payers: 

  1. if you don't get on to them each month, it can be too late. They just keep on keeping on and soon your project or business might be in trouble. There is a domino effect which just gets more complicated. 
  2. there may be a reason, such as a delay in producing invoices, which will need to be fixed.
  3. if you are responsible for a project or business, it's your problem. And others (your managers and the CFO invariably remember). 

Last financial year, the issue of late payers became front page news. This basic '101' management responsibility became a hot topic. Why?  Larger companies were using smaller companies to fund their businesses by paying late. 

At one AGM, a highly-respected CEO went on a blitz about one large company which started paying contractors in the last six months at 66 days. The company spokesperson said 'It's just a bit later than perhaps is usual'. 

This contractor had a practice of paying at 55 days but since it was in the professional services sector (high people cost and tight margins), late payment not only affected the end-of-financial year results (and drew everyone's attention to the company's finances) but put stress on its cash flow. Suppliers can start to get the jitters, as can the share price.

If you were managing this business would you be concerned?

                                     

Your response depends on what you are selling. You’d ask three questions:

  1. Are sales increasing? Need to check if the money got to the bank.
  2. Is the business making a profit? Trying hard to.
  3. Do we need to worry about late payers? We’re due to be paid more (AR) than we owe others (AP).

Is this example company OK? 

This is where commercial acumen kicks in: the low margin means you are not in a strong competitive position, you need to get that cash in, and need to move that $255m of stuff on shelves, hopefully without discounting. 

It is worthwhile tracking the AR:AP results over time - Chapter 4 (FPU) shows how you can use the AR:AP results to show when a new CEO started.  


FOR YOUR PROJECT OR BUSINESS: 

Two issues to know

The invoicing/payment requirements of suppliers and customers 

If you work with governments, you need to factor in time to generate purchase orders, invoice, approval and payment. Look at the reports to see which companies are represented in the accounts receivable (debtors) list. 

Managers can be the problem

A company's reputation for being a late payer could be because managers let invoices stay in their inbox, on the photocopy machine or just buried on their desk. You can make timely reconciliations a KPI!

Two questions to ask: 

1. If customers say, 'Your company always pays late', ask for clarification about the process. Sometimes an invoice may not have been sent. 

2. Is the timing of our business the actual problem? Payments are brought into account when earned. That's why major events and courses tend to be run in the first half of the month. 


This blog is for education purposes only

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