UK SMEs are owed £23.4 billion in late vendor payments! SMEs are forced to wait a month beyond agreed payment terms. Delay in late payments to SMEs is accelerating and it is causing the economy to slow down by increasing the risks for small businesses to become insolvent. The recent data from multiple SME businesses had shown that Day Payments Outstanding(DPO) had been increasing gradually. The average DPO Outstanding is 80 days for many countries.
Similarly in Collection Complexity survey conducted in 180 countries has highlighted the difficulties faced by SMEs in all the countries. DPO’s for India and China is around 65 days and 92 days respectively while businesses in the US wait for 51 days to get payments for delivered goods. Longer payment cycles imply small vendors are facing difficulties in managing the cash flow within the business.
“So what? how does late payments impact me?”.
This growing DPO’s is hurting the world’s economy. A long payment cycle implies MSMEs or SMEs would need higher working capital to operate the business. A higher working capital implies the vendor businesses need to resolve cash shortfalls and face higher costs to manufacture goods and services. Compared to larger players, most small/ medium businesses could not operate the business on a large scale to minimize this impact on the business. Subsequently, late payment risks will affect the solvency of businesses. And since SMEs are the heart of any economy, if SME’s struggle, so does the economy.
Why are Payments delayed?
Most large businesses don’t delay vendor payments intentionally. However, still, the standard invoice processing time is around 25 days and the average cost of processing an invoice is $12 to $30. This delay and cost overrun are caused by the lack of digital transformation in the Accounts Payable (AP) area.
How can the digital transformation of AP function help?
- Workflow Automation: A combination of workflow-enabled solution and proper organizational hierarchy will significantly improve the invoice approval time. With automated workflow, all procurement PMOs within the organization can manage invoice processing faster and work within SLAs.
- Reducing Invoice Exceptions by ML-enabled Invoice Processing: Machine Learning (ML) engine can learn patterns from invoices, extract invoice data elements and identify exceptions faster. With learning from data and better accuracy, ML engine can help AP team to automate invoice processing.
- Automated Invoice Matching: ML engine will use the learning model to improve data matching and achieve straight-through invoicing.
To cut a long story short, SMEs have led the economies in this long expansionary cycle. This trend of late payments and bad supplier relationships will increase distrust and hurt businesses in the long run. It is high time that most companies set DPOs and improve the vendor payment cycles.