What is the effect of late payments to small businesses?
SMEs share a major portion of national as well as global economies. These industries face several challenges during their operational activities. One such barrier is late payments to suppliers that impact their capability to operate smoothly in the market.
Unlike large-scale enterprises, SMEs find it tough to bear the expense of late payments to small businesses. SMEs need to take preventive measures to eliminate the barrier of delayed payments to micro and small enterprises.Â
What is domino effect of late payments?
SMEs lack large-scale resources, due to which they find it tough to settle when customers make late payments to small businesses.
Cash flow is a serious concern for SMEs. Improper cash flow results in low cash reserves, which create new troubles for such enterprises. It impacts their capacity to manage daily business operations.
Small business late payments are a cause for insufficient funds in the reserves of SMEs. Late payments to small businesses lead to negative cash flow.
More often than not, SMEs cut down staff commissions leading to employees’ getting demotivated. SMEs reconsider future investment plans to cover losses due to delayed payments to micro and small enterprises. A well-maintained cash flow forecast can help mitigate these effects by providing better visibility into cash needs and potential shortfalls.
How do late payments affect a small businesses?
Late payment to small businesses is a major concern. It affects small businesses in the following areas.
1. Time and resources
Small business late payments are because of insufficient resources available to SMEs. Lack of resources adds to the causes of late payment to suppliers.
Unlike large industries, SMEs cannot acquire many resources due to insufficient cash reserves. Because of this, late payments keep piling up in SMEs.
Later, compensating for the late payment to suppliers consumes a lot of time and effort. SMEs need to save costs and time to ensure positive cash flow.Â
2. Reduces working capital
In case of late payments to small businesses, cash flow is restricted. Limitations to cash flow are a hindrance to the growth of businesses. SMEs cannot sign new projects due to their insufficient working capital.
Small businesses require positive working capital to purchase resources and fulfill consumers’ demands. They cannot survive in the competitive market with insufficient working capital.
The number of funds and time spent to cover late payments to suppliers is also a barrier to SMEs' growth.
3. Gets harder to increase salaries
Most often, SMEs cut down employees’ salary and commission to compensate for delayed payments. However, a reduction in salary leads to demotivation amongst employees.
SMEs should satisfy the personal objectives of their employees to ensure the proper functioning of business activities.
It is said that a happy employee adds to the growth of businesses. Therefore, SMEs should eliminate the causes of late payments to suppliers.Â
Ways to manage and reduce late payments effectively
Late payment from customers is the root cause of late payment to suppliers. You can eliminate the delayed payments to micro and small enterprises by employing these methods in your SMEs.Â
1. Set up electronic payment method
SMEs can eliminate manual processes by digitizing the payment method. Setting up an electronic payment system saves a lot of time and adds to efficiency.
Through digital payment methods, SMEs can also reduce the causes of late payments to suppliers. Manual tasks are also prone to human errors.
Digital systems add to better user experiences. SMEs can compensate for delayed payments to micro and small enterprises within seconds. Electronic payment methods are a boon to SMEs.
2. Offering discounted invoices
SMEs can encourage early payments from customers by offering discounted invoices. These discounts should be valid for a short duration of time. This encourages customers to pay before the expiry of discount invoices.
Incentives motivate customers to pay on time as it saves their money and generates business credit. SMEs also receive funds for operational activities on time.Â
3. Using invoice automation software
A computerized invoicing process disposes of the drawn-out, manual work of conveying each and every receipt, circling back to clients, and monitoring payments.
All things being equal, cloud-based programming handles your solicitations from start to finish. As a matter of fact, organizations involving automated work processes see a 90% improvement in invoice handling time.
4. Invest in the payments process
The payment process relies upon two parties: you and your client. By fortifying your connections, offering smoothed-out administrations, and understanding your client and current AR framework, you can bring down the number of late payments you get from your customers.
How can small businesses adapt to late payments?
Of course, late payments can be controlled to some extent, but it is also important for SMEs to adapt to this. SMEs can adapt to late payments in the following ways.
1. Pass the cost of late payments
The delayed payments to micro and small enterprises lead to increased expenses for SMEs. SMEs need to deal smartly with this issue. They can pass the expense of late payments on to their customers.
How can the cost of late payments be passed to customers by SMEs? It can be done by increasing the price of the product. In this manner, SMEs can cover the cost of late payments indirectly through their customers.
2. Delay the future expansion plans
When the situation of late payments to small businesses arises, SMEs should restructure their future goals. The organizational objectives of growth or investment should be delayed for a while.
SMEs can reconsider their future goals as and when their working capital becomes stable.
3. Halt planned salary appraisals
Offering salary appraisals to employees during a period of small business late payments is not an idea worth considering. However, putting halt to planned salary appraisals may result in employee dissatisfaction.
Salary and other incentives can be offered to employees when late payments to small businesses can be dealt with in a proper way.
4. Implement debt collection, credit control procedures
Credit control and debt collection procedures should be implemented by SMEs to deal with the causes of late payments to suppliers. This technique can be employed by SMEs to adapt to late payments from customers.
5. Offering discounts
SMEs should encourage discounts on invoices so that customers make early payments. Customers save their money through discount offers and SMEs ensure positive capital flow.Â
The above are some of the ways through which SMEs could adapt to late payments. Late payments to small businesses lead to negative consequences.
Preventive measures must be taken to eliminate the delayed payments to micro and small enterprises. Offering discounted invoices to customers can eliminate the causes of late payments to suppliers.
Suggested read: How automating bill payments can help your business?
FAQ's
SMEs can deal with late payments from customers by properly knowing their customers. Payment agreements should be clear between SMEs and their customers. The invoice must be prompt and correct.Â
Customers can be given a period of either 30, 60, or 90 days to make payments. The time to initiate payment should be mentioned in the payment agreement signed between SMEs and customers.Â
A partial payment is mostly seen as a late payment. It affects your credit score. Thereby, customers should make sure to initiate payment to vendors on time.Â