The Danger of Late Payments to Small Business

By katie simpson on February 23, 2015
Tags: Data Collection

We all know that late payments and long sale cycles are bad for business. But, if you're getting paid, what's the real problem? Late payments can create a cash gap for your business, costing you thousands of dollars.

We know that many small businesses fail within the first five years. The Small Business Administration (SBA) shows that one of the main reasons is from insufficient capital. A long sale cycle can lead to a cash flow gap making your access to capital complicated, and undermining your business.

So how does the cash gap happen? A company has to pay out certain things on a regular basis: inventory, employees, and other expenditures. The problem arises when customers pay late. For instance, you may have to pay a technician for a job before the customer pays for the work. 

Suddenly, you have to cover the difference either with cash on reserve or bank financing. Bank financing is an option, but can create additional expenses on your business. The longer that time difference? The more you have to pay. 

How cash gaps eat into profits

This is how a cash gap eats into your profits. Dollar General, for instance, had a cash gap of 101 days. For each day, it had to finance $6,318,000 to cover their costs. If the company borrowed at 7%, that was a cost of $442,288 each day. 

Closing that gap by 5 days would have added over $2 million dollars to their pretax profits.

Even though we have more technology and faster ways to communicate, it's often getting harder, not easier to collect payment. The Georgia Tech Financial Analysis Lab reported that the average time it took public companies to pay their suppliers jumped from 35 days in 2009 to 46 in 2014. 

Some publicly traded companies are trying to change this. Over twenty companies, including Apple and Lockheed Martin have signed the SupplierPay pledge. But you don't have to wait for your customers to pay faster. 

Tips to improve your cash flow

  • Investigate your current payment issues
    Do you have customers that continually pay late? Is there a lag in your invoicing system? How do you resolve payment disputes. Understanding your current system can show you what is and isn't working for your business.
  • Evaluate your terms with both your suppliers and customers.
    Are you having to pay within 25 days but customers are paying in 50 days? That's an automatic 25 day gap that's on you to fill.
  • Create accurate cash forecasting models
    Every business has season. Retail relies on the holiday season. But that can be the quietest season if you're in B2B. Integrating your information from 
    shipping to sales can help you understand when you need to keep more cash on hand. Less loans and smarter spending means less debts for your business. 
  • Encourage faster payment
    Some companies offer a discount when customers pay upfront. It may be cheaper to have someone pay immediately than it is to wait for the full amount. 
  • Switch to mobile payment
    Mobile payment can allow you to get paid on site as soon as your work is done. No more days waiting to get an invoice finished and sent to a customer. No more days waiting. Just quick and easy payment.

Conclusion

Cash flow and keeping cash gaps as short as possible is crucial, especially for small businesses. Gaps can lead to businesses taking out loans and debt eating into profit. 

There are a few ways you can reduce your cash gaps including more accurate forecasting. For many companies, mobile payments are saving them thousands of dollars and dramatically cutting their cash gap. 

Contact us, and see how mobile payments can transform your business.

 

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