Three payment process insights that prevent bankruptcy of your suppliers

Recent research by fintech Ormsby Street into payment behaviour reveals that many UK retailers struggle to pay their suppliers on time. The performance of these companies varies quite a bit, but one thing was true for all: on average they all pay their invoices beyond the due date. Of course, some companies pay their invoices deliberately late. But late payment can cause delivery stops, severe cash flow issues and even bankruptcy of suppliers. And while most companies sincerely try to be a decent business partner, their payment process simply seem to fail at times.

The findings of Ormsby Street indicate that there is a serious problem, but the fintech does not suggest any solution. Based on our latest international projects in optimizing financial processes, we like to share three insights that may save your relationship with suppliers.

1. Don’t base the quality of your processes on your average payment time
Instead, focus on the individual payments. Using averages will mask the actual situation by balancing both the good and the bad results. Consider a rather simple example (see below) of a company that paid four invoices with an average that was perfectly on time. That seems great, wouldn’t you say? Not for supplier B, as a more in-depth analysis of the individual payments shows. And since the impact of small suppliers on your daily operations often limited is, you could bankrupt them without even noticing.

2. Monitor your working standards closely
Most likely, your process of paying invoices consists of multiple steps. If so, did you set a standard maximum time for invoices to pass each process step? If not, how do you know whether a process step is going well or not? And where would you look for improvement? The three-step example in the figure below helps you to focus on an effective solution.

3. Make sure your payment terms are in line with your standard cycle time
When adding the standard time for each process step, what is the cycle time of your total process? In the same 3-step process, this cycle time can be up to 27 days without violating any standard. Are your payment terms in line with these 27 days?

We find that many companies underestimate their standard cycle time. In their supplier agreements they actually have agreed upon shorter payment terms. Without a doubt, on time payment for these suppliers is seriously at risk. If you are faced with this issue, you have basically two options: either you adjust your payment terms or you improve your processes and shorten your standard cycle time. Although both will do the trick for you, only the latter will help your suppliers.

So, the only guarantee that you pay on time is that you keep to your standards. I know from experience that this is easier said than done. However, if you monitor the performance of each individual invoice per process step, you are likely to discover the precise causes of your failing payment behaviour. Solve it quickly and you will benefit from your improved relationship with your suppliers.

Chris Beckers is Business Process Consultant at R&G Global Consultants.

Supply chain performance