How late payments can affect your business
In a tough economic climate, late payments can have a significant impact on business operations, particularly when a business has few other financial resources to draw upon.
In fact, the Federation of Small Businesses (FSB) has argued that the issue of late payments of bills by larger firms to SMEs is one of the “biggest challenges for small firms”, with the problem so great that a committee of MPs and business groups has been formed to investigate inadequate supply-chain practice across the industry.
Debbie Abrahams, MP for Oldham East and Saddleworth, who chaired the inquiry, said:
“Many large companies are deliberately paying late or extending their pre-agreed payment terms simply because they have the power to do so.”
The recommendations include requiring contractors who bid for government contracts to sign up to the Institute of Credit Managements (ICM’s) Prompt Payment Code (PPC), which requires those who sign to agree to the following measures: pay suppliers on time, give clear guidance to suppliers and encourage good practice.
Here are just a few ways that late payments can affect your business:
Difficulty paying suppliers
Without payments being made on time and for the correct amount, businesses may find that they don’t have the funds to pay their suppliers. This is supported by FSB research which shows that 77% of businesses argued that late payments meant they couldn’t make prompt payments to their suppliers.
Fall in profits/turnover
Research has shown that late payments or bad debts have caused 35% of small businesses to see their profits fall, while 16% have seen a clear reduction in their turnover.
Without the cash needed to support the growth of a business and meet ongoing costs, businesses may find that they need to dip into their revenue to stay afloat, thereby reducing their profit margins.
Cash is still king, when it comes to the success of any business, and as late payments may hamper a company’s ability to manage their cash flow, they may not have the resources to develop and build on their existing operations. This may ultimately lead to them falling into business administration or lead to them significantly scaling back the overall scope of their business.
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