Business
See no invoice, pay no invoice: the ERP “black hole” fuelling late payments
Global Banking & Finance Review®
Company
By Stephen Carter, Smart Procurement Evangelist, Ivalua
Late payments continue to make a serious dent in the economy, costing UK businesses £27 billion each year. But the impact of late payments is far-reaching, leading to stalled cashflow and production, supply chain disruption, and damaged relationships. In fact, research shows that 59% of UK businesses reported suppliers have ended the relationship with them due to repeated late payments.
It’s not surprising to hear this. Timely payments are often the key to suppliers’ survival, especially when times are tough. If late payments had been made on time and as promised, the Federation of Small Businesses claims 50,000 UK business closures could be avoided each year. With fewer businesses closing their doors, there’s less threat of supply chain disruption, as organisations won’t have to spend time or resources identifying new suppliers and building new relationships.
The issue has grown so large that the UK government has taken action. It is considering how to update the UK’s Payment Practices and Performance Regulations ahead of their expiry date on the 6th April 2024. This means organisations need to act now to improve payment practices, but first, they need to overcome some technological and operational challenges.
With late payments impacting supply chains, something must change – but organisations need to understand where the problem starts to truly address it. Typically, the biggest issue causing delays to payments is low visibility into spend. All too often, the supplier payment function lives in an ERP “black hole” that’s highly inflexible and disconnected from upstream processes like procurement or banking systems. Without any insight into supplier payments, it’s almost impossible for firms to track if payments have been made.
In fact, Ivalua research found a third (35%) of UK businesses have a severe lack of visibility into payments, and 58% reported a disconnect between procurement and finance teams, making it hard to ensure suppliers are paid on time. With so many businesses lacking visibility, they run the risk of negatively impacting supplier relationships and the stability of their supply chains.
Without the ability to understand and control when suppliers have been paid, firms also won’t be able to work with suppliers to make strategic payment decisions that incentivise supplier performance.
There is a better way of managing supplier payments. With a cloud-based procurement platform, organisations can generate a single view of their supplier payment landscape and automate the payment process from end to end. This will ensure collaboration between accounts payable, the business, and suppliers. With this bird’s eye view, firms can better understand, and control their spend. They can also use this single source of truth to automate manual payments processes to drive same-day approvals, eliminating late payments altogether.
With improved visibility into spend, organisations can also start to benefit from modern payments technologies like virtual cards. With the right technology foundation, virtual cards can be automatically generated with set amounts so employees can spend allocated budget directly and make payments instantly and securely. This eliminates the need for lengthy approval processes, further speeding up payments for projects, and providing detailed spend data that can be tracked against budgets.
But why stop there? Once payments are automated, organisations can use this information to add strategic value – using payments to drive performance, generate savings, and reduce financial risk.
One of the most obvious examples of using payments strategically is paying early. This can often result in discounts, helping towards the organisation’s bottom line. What’s more, in times of supply shortages, the ability to offer early payments could be the deciding factor on who a supplier chooses to offer their in-demand stock to. This is critical to organisations’ survival as geopolitical instability continues to rock supply chains across the globe – with Make UK predicting supply chain pressure will continue until at least 2024.
For firms who need to manage suppliers and incentivise them throughout long projects, staggering payments throughout can also be a vital tool to drive performance and efficiency. By timing payments against key milestones throughout a project, organisations can promote collaboration and communication, while ensuring that suppliers are paid on time when the work is done.
With better insight and control over payments, organisations can also utilise their newly freed-up liquidity to drive further savings across the supply chain. For example, organisations can bulk-buy goods up-front at a discount to help reduce costs, provided that additional inventory costs remain under control.
While the UK government is revisiting its approach to tackling late payments and will likely increase its scrutiny, now is the perfect time for organisations to transform their payments processes. By improving payments practices now and eliminating the ERP “black hole”, firms will be able to get ahead of any updates to regulation.
But more than this, organisations will be able to use their greater insight into and control over payments to start reaping the rewards before any new regulation comes into force. Firms that enable strategic payments will start benefiting now as they build better ties with suppliers, and work alongside their suppliers to identify cost savings and find new ways to mitigate risk.
Cash flow refers to the total amount of money being transferred into and out of a business, especially as it affects liquidity.
Late payments occur when a buyer fails to pay for goods or services by the agreed-upon date, impacting cash flow for suppliers.
Supplier relationship management is the systematic approach to developing and managing partnerships with suppliers to maximize their performance.
Payment practices refer to the methods and policies a business uses to manage its payments to suppliers and vendors.
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