Why suppliers should be paid in 7 days, not 70 days!

Being an agency

In a financial world driven by hyper-speed software automation, it seems not everyone sees the benefits

We live in a world where computer systems now do much of the drudgery of manual admin. So why do we persist in keeping suppliers waiting for invoices to be settled?

There was a good reason 25 years ago to implement a 30-day credit system. Invoices needed to be printed and then sent by mail to the client, who in turn had to open them, stamp them, circulate and approve the invoice. Finally, a cheque had to be raised, signed and sent back to the supplier and then left to clear into the suppliers bank.

Even if the process ran at full speed it would still take around 15 days end to end. More often the process was a good deal slower, and in the latter years of the 20th century, average payment times for most business was around 40 days.

Today, however, we live in a world of electronic transmission, e-payments, and internal SOP systems, software, automated reconciliation, and cloud-based accounting. The world is now super-fast, super-automated, super-accurate and doesn’t require specialist knowledge. Invoice to cleared payment can be turned around in a day or so. Easily.

So surely payment times have fallen as we take advantage of technology? Well, actually they have got worse. Today, most companies have to wait, on average, 70 days to receive payment. WTF!

We are a small business and as a result only make one payment run per week, yet we manage to pay suppliers in an average of 4 working days. So why can’t other, more sophisticated businesses do the same? Or, more to the point, why don’t they? Clients holding on to overdue payments feels tantamount to blackmail or coercion but the practice is pervasive in the UK economy. And nobody wins when invoices are paid late.

Why it’s good to pay on time, or even early

It might seem counter-intuitive, but releasing payments early actually helps everyone. Why?

  • Paying early increases trust. And trust underlines every business relationship
  • Suppliers can better plan cash flow, releasing more “reserves” to fund growth and services for clients
  • Clients reduce their level of trade creditors, making them more attractive to funders and other suppliers
  • Suppliers will work harder and will be more flexible if they are paid early, increasing the value they bring without increasing the cost to the client
  • Less resource is wasted on the chase/avoid/excuses/threaten cycle that late payment generates
  • Fewer sleepless nights for suppliers, reduced stress and wasted effort on admin means the business can focus on doing what is does best
  • Fewer suppliers going to the wall due to cash flow starvation creates greater competition for clients to tap into
  • Removes the high cost of invoice finance that some suppliers have to use, gives increased profit and quality of service.
  • Makes everyone feel better.

Money on deposit is earning so little today (0.5% maybe) that there is little loss of earned interest. We buy-in a lot of services from 3rd parties, and paying bills super-early makes us super-special, it creates a tighter working bond and removes one major element of friction that often exists in the supplier-client relationship.

It also gives us a special edge when working with suppliers, an edge very rarely exploited by our competitors. In a selfish kind of way, we’re happy that they are so tight settling invoices as it makes us super-special – but for the greater good, it’s important that clients at least pay on time.

How we run our purchasing

We’re fans of keeping things simple so here is how we look after our suppliers:

  • Invoices are all sent to single email address
  • Every Friday this box is opened and invoices approved, or queried, on the same day
  • Approved invoices are paid the next working day (usually Monday)
  • Queried invoices go into next week payment run, assuming the query is resolved

Suppliers know this process and adapt accordingly. Frequently we see a flurry of invoices arrive on a Friday and they’re settled the next working day. How’s that for a speedy process?

Paying on time, or early, is a good thing. I promise.