We have observed a consistent trend emerging over the last 12 months with payment terms not being worth the paper their written on, in the absence of someone standing behind them. It is certainly becoming apparent as a frequent contributing factor in the increasing number of corporate insolvencies.
One can deduce that a number of factors contribute to people’s unwillingness to ask for what is rightfully theirs. We contemplate these to be:
- Fear of upsetting the customer
- Fear of compromising repeat business
- Fear of pushing the status quo
In our analyses the status quo, the aging of debtors are being pushed well outside of 120 days and is becoming commonplace amongst many industries. Expecting payment within 30 days is now a thing of the past and many businesses are acquiescing because, they too, are struggling.
Some creditors (particularly the large industry players) who have the cash flow at their fingertips to pay their debts are benefiting from this even though then can still afford to pay in 30 days. They too are riding a wave of paying late as it is becoming more acceptable. This has exacerbated the existing cash flow issues of small to medium businesses.
Payment policies are the life support of any business. It is imperative that suppliers periodically review their internal receivables policy, make their customers aware of the policy and enforce it.
Two key elements of the policy need to be:
- Defined due dates (i.e. 14 or 30 days etc) and what recovery action is taken within defined periods (i.e. 30-60 days: reminder letter followed up by phone call; 60-90 days: stop credit/ supply and further reminder letter and phone call; 90-120 days: referral to debt collector or solicitor)
- Imposing a limit on the customer’s credit account
Too many times have we seen the aftermath of suppliers who either give too much credit to a customer that goes into liquidation (irrespective of an accounts receivable policy being present) or worse still not enforcing it, receiving nil payment and continued to supply over the agreed credit limit.
Although many businesses need to be flexible and competitive in their market, it is timely for clients to be reminded that the business is not a lender. Also they should remember the adage that “the squeaky wheel gets the oil” remains true! Or they too may share the same fate as their customers who fall into liquidation.