Blog Posts Business Management Process Analysis

To Pay or Not to Pay – Why it Shouldn’t Be a Question

Blog: Kofax - Smart Process automation

Long-term supply chain stability depends on technology-enabled, ethical payment practices

If you have a credit card, you probably don’t question whether or not you have to pay your bill. Or, at least, you know not paying will inevitably result in late fees, incessant phone calls from your credit card company’s swarms of collections agents and bad marks on your credit report. To Pay or Not to Pay – Why it Shouldn’t Be a Question (1)This, in turn, could lead to possible feelings of regret about splashing out on that carbon fibre road bike you haven’t actually ridden yet but that looks cool propped up in your garage.

Now it’s just you and your carbon fibre bicycle against THEM. All of them.

Suppliers also offer credit arrangements to the businesses that order from them. But in the business world, the balance is often flipped from that of a consumer/creditor. The supplier is always “the little guy.” In this scenario, they’re the ones who have extended the credit and are asking to be paid. And they run the risk of losing accounts if they push too hard.

For them, optimizing working capital and receiving timely payments is key. But it’s so much more painful than just sending a late notice or sticking a credit collector on a delinquent account.

Back-Breaking Payment Practices in the Spotlight

Receiving timely payments means suppliers can meet critical business commitments, particularly in busy periods, when taxes, salaries, bonuses and more must be paid – sometimes all at once. Late payments often push them into funding working capital through overdrafts or loan facilities. These means are expensive, and, if you’re a small business or one that’s trying to expand and grow without over-trading, they can be crippling.

But the negative effects of late payments don’t stop there. Small to medium sized businesses (SMBs) are the backbone of world economies. That’s why it’s surprising that governments have just recently begun to spotlight this problem and look for solutions.

According to an article from The Guardian, “A staggering £26bn is owed by larger businesses to small firms in the private sector. Late payments cause 50,000 businesses to go bust every year, at an annual cost to the economy of roughly £2.5bn.” This economic drain is what spurred the UK government to back The Prompt Payment Code, an effort to set payment practice standards to protect SMBs and create a cultural shift in business norms. Businesses make a voluntary commitment to pay according to the terms set in the code.

The U.S. took a different route in its efforts to stem the ill effects of late payments to SMBs that feed the economy. According to the U.S. Small Business Administration (SMA), “the 28 million small businesses in America account for 54% of all U.S. sales.” Under the Obama administration, the federal government required large businesses with government procurement contracts to pay small suppliers within 10 days, says The Guardian. It also leveraged the SMA to “promote prompt payment through the federal procurement supply chain.”

Similar to the UK’s efforts, the Australian state of Victoria has recently introduced “The Victorian Fair Payment Code,” which asks businesses to pledge that they’ll pay suppliers within 30 days. An article from Fast Company notes that the initiative, which takes effect on July 1, 2017, has the potential to become mandatory “for all businesses in the state if the government does not see an improvement on the times it takes to clear invoices.”

For a Few, Late Payments Pay Off

But the U.S. didn’t seem to create any lasting change amongst the largest corporations with its efforts. Bloomberg View Columnist Justin Fox covered the topic of late payments in a May, 2017 article. “Only 10.8 percent of publicly traded corporations in the U.S. pay suppliers on time or early, according to new data from Dun & Bradstreet,” writes Fox. “If almost everybody in your peer group is delinquent, there’s unlikely to be much of a stigma attached to delinquency.”

The reason for this widespread bad behavior? According to Dun & Bradstreet insights quoted in Fox’s article, late-paying corporations have higher stock returns than those who pay on time. If the goal is to make a lot of money, and large companies are rewarded with more of it for being delinquent… well, you see the problem.

But paying late doesn’t always work out in the business’s best interest. Example: This Silicon Valley tech firm is the subject of a $10 million dollar lawsuit. Of course, most suppliers in the SMB space don’t have the funds to pay the legal fees associated with suing a huge company for non-payment.

One compelling argument for more ethical treatment of the supply chain revolves around choice. Say a large company has an account with a supplier to order a large amount of goods, amounting to tens of thousands of dollars. If that company withholds payment for the goods they’ve ordered, they put the supplier in the position of not being able to pay their suppliers.

As a result, the entire supply chain suffers. If this happens over and over again, businesses fail. In the end, big firms have less choice available within the market, and they end up paying higher prices.

It Takes More than Good Intentions

While there are many big businesses that fit in with the crowd above, there are still many more of all sizes that want to pay their bills on time but are challenged by invoice processing complexity. With growing invoice volumes come greater numbers of exceptions, and when manual processing is still part of the equation, errors and lost documentation follow closely behind.

Lacking the right technology, many companies simply cannot get their payments submitted fast enough. And they lose out on early payment discounts offered by suppliers who hope to incentivize companies to pay faster.

The average number of days it takes for companies that “run the gamut of AP performance in 2017” to process a single invoice is 10.3 days, according to a new report from Ardent Partners. The best-in-class make up the top 20% of these AP departments and have a cycle time that averages out to 3.5 days.

88 percent of these top AP performers have standardized their processes across their organizations. “Adoption of technology is another area where the best-in-class clearly differentiate themselves from the rest of the market,” explains the report. Advanced automation technologies that integrate with ERP systems, including capture, workflow and RPA solutions, don’t just help companies achieve shorter cycle times and major cost savings. They allow them to make continuous performance improvements a way of life.

But companies face pressure to pay many different entities, including governments. For some, choosing to pay a supplier may mean not complying with tax laws. A recent article from Forbes discusses tax evasion charges brought against the CFO of Soupman, Inc., the restaurant chain that inspired Seinfeld’s famous Soup Nazi episode on the television series.

While it’s not clear in this case whether Soupman CFO, Robert N. Bertrand, paid suppliers instead of taxes, the article makes an important point: “Any failure to pay—even late payment—is serious, regardless of how or why the employer or its principals use the money. Using the money to pay suppliers and keep the business open isn’t a good reason in the IRS view.”

E-invoicing is one technology that’s helping companies increase the efficiency and cost-effectiveness of their invoice management while also creating transparency into documentation and audit trails to ensure regulatory compliance. Though it hasn’t completely caught on in the United States, countries in Europe, Latin America and Asia Pacific are using e-invoicing to successfully streamline and standardize the sending and receiving of invoices.

The Tide is Shifting

In today’s uncertain business environment, more and more governments are shining the watch light on the fact that SMBs are the backbone of their economies. And backing measures to encourage more ethical payments is certainly a first step in a giving visibility to this widespread crisis.

But real change will come from organizations that believe in the potential of technology to begin a transformation that encourages both profit and ethical practices – one that ripples out from accounts payable to purchase-to-pay to end-to-end financial operations to the company as a whole and then infinitely outwards in the supply chain.

The benefits of operating ethically towards your suppliers are real. Trust, better relationships and the certainty of order delivery and fulfilment will be new sustaining forces for companies of all sizes that choose to be part of the payment practice sea change that is already starting to take place.

If you’re interested in how technology can boost your company’s ability to shorten payment cycles and optimize processes, download our P2P automation whitepaper.




Leave a Comment

Get the BPI Web Feed

Using the HTML code below, you can display this Business Process Incubator page content with the current filter and sorting inside your web site for FREE.

Copy/Paste this code in your website html code:

<iframe src="" frameborder="0" scrolling="auto" width="100%" height="700">

Customizing your BPI Web Feed

You can click on the Get the BPI Web Feed link on any of our page to create the best possible feed for your site. Here are a few tips to customize your BPI Web Feed.

Customizing the Content Filter
On any page, you can add filter criteria using the MORE FILTERS interface:

Customizing the Content Filter

Customizing the Content Sorting
Clicking on the sorting options will also change the way your BPI Web Feed will be ordered on your site:

Get the BPI Web Feed

Some integration examples