Timely payments stand as a crucial pillar supporting business operations.
They are not merely transactions, but the lifeblood that ensures smooth operational flow, which symbolizes financial health and business trustworthiness.
Unfortunately, payment delays are a common hurdle many companies face. They disrupt cash flow, a critical component for maintaining business stability. Cash flow interruptions cascade into various operational challenges, affecting everything from payroll to investment.
Consider this, for example:
Statistics show that 54% of SMEs experience late payments, with 6 days being the average delay. 20% of invoices are 2 weeks overdue, while 33% take more than a month and 20% take 60 days or more to be cleared.
The problem occurs while chasing these invoices, where companies often spend a great deal of time.
Over 40% of businesses do not attempt to chase payments at all, while those that do spend at least 15 days annually chasing their invoices.
This article dives into the root causes of payment delays.
Understanding the causes is the first step in developing effective strategies to address and mitigate their impact.
The Psychology Behind Delayed Payment
The behavioral factors influencing payment habits include a wide range of psychological and practical considerations that affect how and when customers eventually pay.
- Unwillingness: A common human tendency, “procrastination”, significantly affects payment habits. Customers delay payments because of a lack of urgency, especially if there are no immediate consequences for it.
- Financial challenges: Customers often prioritize payments based on their financial situation and budgeting strategies. If they face cash flow issues, they will delay payments to manage their immediate financial needs.
- Satisfaction issues: The level of satisfaction with a product or service can influence payment timing. Customers who perceive high value or satisfaction with a service or product are more likely to pay quickly.
- Habituated behavior: Some customers have developed habits regarding how they handle bill payments. For example, some will consistently pay bills at the end of the month, regardless of the due date or net terms.
- Debt psychology: Different individuals have different attitudes towards debt and credit. Some may feel uncomfortable owing money and pay quickly, while others will be more relaxed about carrying debts.
- Payment process complexities: If the payment process is complex or time-consuming, customers will delay completing it. Simplicity and ease of payment can encourage timely payment.
- Forgetfulness: Truth be told, simple forgetfulness is a common reason for delayed payments. This holds true in the absence of reminders or when dealing with an infrequent payment schedule.
- Relationship with the company: The level of trust and the nature of the relationship between a customer and a vendor can influence payment behaviors. Customers are more likely to prioritize payments to vendors they have a strong, positive relationship with.
- Improper awareness: Customers who are not fully aware of the payment terms (such as inflicting a late payment interest), or who don’t understand them, might inadvertently delay payments.
Although these psychological tendencies differ among companies, there is a shared aspect to the occurrence of payment delays.
10 Common Reasons Why Customers Delay Payment
Understanding why customers delay payments is critical — and each of these reasons highlights the importance of efficient, clear, and communicative billing and accounts receivable processes.
1. Ongoing dispute: Disputes over the quality of the product or service, discrepancies in contract terms, or implementation (or delivery issues) often lead to delayed payments. Customers will withhold payment until the dispute is resolved to their satisfaction. This situation calls for effective communication and dispute-resolution mechanisms.
2. Inefficient billing: If a company’s billing system is outdated, cumbersome, or error-prone, it leads to delayed or incorrect invoices. This inefficiency causes payment delays, as customers may not receive their invoices on time or receive inaccurate bills.
3. Invoice sent to spam: Invoices could sometimes get lost in the mail or email spam filters, leading to customers genuinely not receiving them. This scenario highlights the importance of ensuring that the invoicing process is reliable and confirming receipt of the invoice.
4. Customer (claims) they have already paid: This situation arises because of miscommunication or record-keeping errors. It causes a thorough accounts receivable management process to confirm payment status and resolve discrepancies.
5. Customer (claims) they did not receive the invoice: Similar to the point above, this can be because of delivery issues or invoice mishandling. Implementing a follow-up process to ensure invoice receipt can mitigate this problem. Alternatively, rechecking dunning sequences within the accounts receivable automation solution can also help.
6. The AP team requires further clarity on product or service: Sometimes, the customer’s accounts payable team will not have additional information about what they are being charged for, and you guessed it — this leads to payment delays. Providing detailed invoices and proactively answering queries to the accounts payable team in this situation can help speed up payment processing.
7. Customer is on churn alert: If a customer is considering ending their relationship with the company, they will delay payments as a signal of dissatisfaction or because of uncertainty about continuing the service.
8. AR team conducts repeat follow-ups: This shows a miscommunication or mismanagement within the accounts receivable processes. It's essential to have an accurate and updated record-keeping system to avoid such redundancies.
9. Customer cannot pay Financial difficulties faced by the customer lead to delayed payments. This situation requires a sensitive approach, possibly offering payment plans or discussing alternative arrangements.
10. Incorrect invoice sent: Sending out an invoice with errors, whether in the billing amount, customer details, or service descriptions, can lead to delays in payment as the customer seeks clarification or correction of the invoice.
Impact of Delayed Payments
The impact of delayed payments on businesses of all sizes is significant and multifaceted. These delays create a ripple effect, influencing various aspects of a business's operations and financial health.
Let’s look at these:
- Cash flow hindrance: One of the immediate effects of a late payment is cash flow disruption. This can be particularly damaging for small businesses that rely on a steady cash flow to meet day-to-day operational expenses, like paying staff and suppliers. When payments are delayed, these businesses can struggle to cover essential costs.
- Negative impact on business growth: Delayed payments hinder a business from investing in growth opportunities. When funds are in the form of an unpaid invoice, companies will find it challenging to allocate resources for expansion, such as hiring new staff, purchasing inventory, or upgrading equipment.
- Strained client relationships: Payment delay strain relationships with customers. When a company struggles to pay its suppliers on time because of delayed receivables, it can damage its reputation and make it harder to negotiate favorable terms in the future. Constantly chasing clients for payments (or charging a late payment fee) can sour relationships and impact future business.
- Increased financial stress: Persistent cash flow problems can lead to increased financial stress for business owners, potentially affecting their decision-making and overall well-being. In extreme cases, this can even lead to insolvency or business closure.
- Dependency on external financing: To manage delayed capture, some companies will rely on external financing, such as loans or lines of credit. Not only does this introduce additional costs (like interest payments), but it also causes financial risk to the business.
- Increased work: Chasing late payments often requires a significant workforce and resources. Businesses spend valuable time and effort in following up on unpaid balance, which could be used more productively in other areas of the business.
Mitigating the impact of late payments involves several strategies, such as implementing clear payment terms, streamlining invoicing processes, offering flexible payment options, and regular cash flow tracking.
Some businesses also turn to automated accounts receivable systems, which can enhance efficiency and accuracy in the invoicing process and reduce errors that lead to payment delays.
These solutions often come with additional features like detailed payment history reports, which can help to expect and mitigate cash flow issues.
Where preventive measures are not sufficient, companies will consider legal recourse as a last resort to recover overdue invoices. This, however, should be carefully thought out and considered, as it can have further implications for client relationships and reputation.
3 Ways Delayed Payments Affect the Business Ecosystem
- Costs and burden: Managing late payments adds to the workload, requiring additional time and resources from accounts receivable and payable teams. This detracts from other productive activities and can lead to increased costs, such as a late fee.
- Employee morale: Late payments can force businesses to cut costs, often affecting employee salaries and commissions, which can lead to demotivation and reduced productivity. Significant time and resources might be diverted from core business activities to manage the repercussions of late payments.
- Market reputation: Consistent late payments can harm a business's credit score and reputation, making it more difficult and expensive to get loans or funding in the future. This can create a cycle where businesses struggle to recover from the financial strain caused by late payments.
To mitigate these impacts, businesses often employ strategies such as setting clear payment terms, using technological solutions like accounts receivable automation software, or considering legal action in chronic late payments.
Tech Stack for Effective Credit Management
An accounts receivable automation software is an effective, yet powerful tool for companies looking to solve the challenge of payment delays. Here are some ways it can help:
- Reminder automation: AR solutions can be configured to send payment reminders to customers automatically before and after the due date. This ensures consistent communication and reduces the chances of payments being forgotten or overlooked. These solutions can help set up workflows and also provide control for collection specialists to pause, resume, or stop campaigns altogether.
- Real-time updates and insights: AR software provides real-time visibility into the status of each outstanding invoice, including those that are pending, paid, or overdue. Users can also drill down and view insights into current DSO, CEI, and APP metrics, and open disputes among others.
- Multi-stakeholder visibility: The solution integrates with key tools other stakeholders frequently use — for example, Salesforce and Slack. This ensures that there’s no loss in context and that other stakeholders have access to the same real-time data that the AR team also has access to.
- Disputes and escalation management: The software includes tools to manage and resolve disputes efficiently. It keeps a record of all communications and transactions, which can be referenced to clarify any misunderstandings or disputes over invoices.
- Track customer health: Accounts receivable software also uses past payment patterns of the customer, at both an account and invoice level, to assign a score that lets companies determine payment likeliness. For example, a higher score shows they are more likely to pay and vice versa.
- Credit report: AR software can assess the creditworthiness of customers, helping businesses identify high-risk clients. This information can help in deciding on credit terms and taking proactive actions for specific accounts.
- Enhanced customer experience: With detailed records and easy access to payment details, customer service teams can more effectively address payment queries and concerns, improving overall customer experience.
- ERP compatibility: AR software integrates with ERP solutions and ensures it captures crucial data to ensure that the collections team can confidently rely on a single source of truth. This also limits juggling between multiple tools, reducing workflow, and improving productivity and accuracy.
- Touchless cash posting: AR solutions can also, to a large extent, help reduce the manual grunt work involved in cash application, with highly accurate matching and drive an increase in same-day invoice posting.
Understanding and addressing the primary factors behind payment delays is essential for businesses to maintain healthy cash flow and minimize the impact of delinquent accounts.
- Clear communication
- Transparent payment terms, and
- Technology for streamlined processes
are key strategies to unlock the path to prompt payments.
Measures such as credit checks, personalized customer interaction, and flexible payment choices help strengthen the credit management system.
Ultimately, a comprehensive approach that combines preventive measures and responsive strategies will empower businesses to navigate the challenges of payment delays and position themselves for sustained success.