B2B Direct Debits – Addressing escalating costs associated with payment control
Managing cash flow has become one of the great SME arts over the past year and looks set to remain a critical skill for business survival for some time to come. But just how many organisations understand the costs that are being incurred as a result of failing to pay on time?
The costs are, in fact, significant. Organisations are spending considerable time and resources on the escalating administration associated with manual payment processes and in fending off calls from creditors. To add to this, under the Late Payment legislation, there is a very real risk of penalties.
Signing up to pay key suppliers via Corporate Direct Debit (DD) significantly reduces this cost for payers. Not only is the payment transaction paid by the payee, but embracing a guaranteed payment method removes a significant administrative burden and minimises credit control activity, explains Georgia Leybourne, Sales and Marketing Director, Albany Software.
Payment Pressure
As the recession deepens, payment delays are increasing and there is no doubt that SMEs are now spending a far greater proportion of time on credit control and managing cash flow. The 'cheque is in the post' excuse could be replaced by 'you will be paid with the next Bacs run'.
With the advent of Faster Payments offering real-time, provable bank transfers, organisations face growing pressure to use this approach to meet supplier payment demands, and incurring the £3-£4 per transaction cost.
Take into account the cost of weekly and monthly payment cycles, cheque processing fees wrapped up in the overall bank charges and Bacs payment fees, it becomes difficult to assess the true cost. Add in the cost of Faster Payments, extended overdraft facilities (where available), administrative costs associated with manual payment processes and finance staff dedicating a greater proportion of time to credit control, and the business cost associated with making payments is rising significantly at a time when it can be least afforded.
Payment Control
There is a pressing need to address the escalating costs associated with payment processes and one option is the use of Commercial Direct Debits (DDs). Already accounting for the vast majority of consumer to business payment activity, DDs have yet to catch on amongst business users in any great numbers. Since DDs offer the payee huge advantages through guaranteed, on time payments and associated cash flow control, the resistance can only come from the payer community.
Yet DDs also provide tangible benefits for the payer - most notably in reducing the administrative process associated with preparing and making payments. An organisation knows when the payment is due; it is scheduled and happens automatically. The cash is debited from the bank account at a set time, as expected, unlike cheques, which can take days to arrive and are not always immediately cashed, putting further pressure on the cash flow management process.
Replacing traditional payment methods such as cheques with DDs also reduces the risk of fraud, which is a growing concern in the current economy. Indeed, with the banking industry and the Payment Council expected to make it increasingly difficult and expensive to use cheques over the coming years in the build up to phasing out cheques for business use by 2018, the early adoption of DDs ensures organisations already have an alternative payment solution in place.
Furthermore, for the payer the transaction has no associated cost since the fee is paid by the DD originator - delivering an additional financial benefit. And, with guaranteed payments lined up, in bound calls from creditors will significantly reduce, freeing up additional resource within the finance team.
Negotiated Settlements
In the consumer marketplace, the majority of organisations are actually charging more to those customers not paying via DD to offset the additional credit control and administrative costs associated with traditional payment methods. Whilst this approach is unlikely to be replicated in the business market in the short term, payer organisations can certainly leverage the guaranteed DD process to negotiate better payment terms - from percentage discounts to extending the traditional 30 days to 45.
This approach eliminates the need to impose Late Payment legislation penalties, which can only put greater pressure on organisations already struggling to stay in business, resulting in more - and often more senior - resources being consumed by credit control.
By implementing a guaranteed payment mechanism, better relationships will be facilitated between the two parties, and settlement opportunities can be negotiated.
Conclusion
According to research conducted by Bacs Payments Schemes (Bacs), British small and medium size enterprises are now owed a massive £25.9 billion after overdue payments rocketed by almost 40 per cent over the last year, up sharply from £18.6 billion.
And the impact of this late payment trend can only increase, with organisations compelled to delay their own payments as they wait for key debts to be settled. This burden of debt is putting untenable pressure on SMEs and will, inevitably, contribute to the downfall of some organisations as a result of a lack of cash flow control and the costs associated with managing the credit process.
Signing up to make payments to key suppliers via DDs provides a guaranteed payment that ensures better cash flow visibility and management but also drastically reduces the cost associated with supplier payments. Critically, it also provides an opportunity for a renegotiation of payment terms that could deliver significant additional value and prompt a domino effect of more timely payments across the board.
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