EOW Reflections: Paying the price

When is the right time to pay for a job well done?

When I shop I pay there and then. Yes, there are likely to be short delays before the money is in the business owner’s account but to all intents and purposes consumer to business payments are immediate. There’s a lot of headlines about shoplifting but in the main the rules still apply, and consumers don’t walk out of the shop (online or bricks and mortar) with the goods unless they’ve paid.

Employees are usually paid monthly. If the payment covers the calendar month then in reality you are waiting up to 31 days for the work delivered to be paid for but you have a date when you get your salary. Some people are paid two weeks behind and two weeks in advance. The key though is you know when the money you’re owed will be in your bank account. Employers who suddenly decide to pay a week late or change the payment terms to every three months instead of every month face mutiny.

In business to business, payments are subject to a much wider range of arrangements. 30 days seems to be the payment period that most think fair but this week I’ve seen everything from next day payments, to a contract offering payment terms of 365 days, a firm extending payment terms from 30 days to 60 days (take it or leave it), and a company telling its suppliers that over the summer there will be a gap of 6 weeks when no payments will be made at all because new systems are being installed.

365 days payment terms brought me out in a cold sweat. How can suppliers survive if they’re have to wait a year to be paid? But I haven’t seen the detail so perhaps I shouldn’t jump to conclusions. Firms installing new payment systems are all coming across similar issues. They’re spending fortunes updating old processes that are no longer fit for purpose and causing payment delays, but the new systems can’t be switched on overnight so there’s a gap to manage. Next day payments? Technology makes it possible, and firms are increasingly realising that cutting the time taken for invoicing, reconciliations, approvals etc can only help improve productivity as well as working relationships. Issuing a ‘take it or leave it’ notice of increased payment terms could signal a firm is in financial trouble. It’s not a good look from any angle.

What do the suppliers want? Certainty is the word that keeps cropping up. Like employees, suppliers want to know that, if they have been told invoices will be paid on a particular date, then the money will arrive that day. Some say it would be great to be paid the next day or in 30 days but even 60 is OK as long as they know for sure that payments won’t be late. How can you keep on top of the cashflow if it’s possible you may have to wait an extra week to get paid. Late payments are late by on average 6/7 days according to Xero but averages hide some shocking figures.

I’ve realised that most people working for most big firms have no desire to do anything other than the right thing. But most of them are dealing with their own small part of a much bigger process and have very little awareness of what happens before or after they do the job they’ve been employed to do. The bigger the firm the more siloed the working environment and the less likely anyone looks up and thinks about how things could be improved for small business owners they know nothing about and have never met. They probably have no idea of the impact on a small supplier of waiting an additional week beyond the agreed payment date. If you’ve always had your salary paid at the end of the month and never experienced worrying about paying your bills, wages and suppliers while wondering where your payment has got to, how would you understand the anxiety it causes.

So, what’s the answer? Average payment times have come down a long way in the past decade and overdue invoices aren’t so late as they were either, but there’s a long way to go before we can say ‘job done’.