Late Payments Stretch Business Cash Flow As 15 Pct Of Receivables Are Overdue

In B2B, late payments were a problem – globally – even before the pandemic hit. But now, chasing overdue payments takes up time and energy that adds to other operating pressures – and torpedoes cash flow. The silver lining, as PYMNTS/American Express have found: greater attention to automating antiquated, manual AR processes.

The pandemic has led firms of all sizes to re-examine their accounts receivable (AR) processes, where days sales outstanding (DSO) – the number of days it takes to collect payments – are being stretched, which of course is a direct result of late payments.

To that end, and as detailed in the September B2B Payments Innovation Readiness Report, a PYMNTS and American Express collaboration, entrenched manual processes have caused companies to struggle with collections. Our research, across 460 firms, shows that on average, 14.7 percent of business-to-business (B2B) receivables are overdue.

And it’s not simply an SMB problem. As for the companies that generate $500 million in annual revenue, 16 percent of their B2B receivables are overdue, compared to 14.3 percent for mid-sized firms generating between $50 million and $500 million, and 13.8 percent for small firms that generate less than $50 million in annual revenue.

Manual Processes And Constrained Cash Flow 

Manual processes are hurting cash flow, according to the report. Companies that are marked by manual AR operations have DSOs that stretch out 30 percent longer than companies that have at least a medium to high level of automation of those same AR processes. And when it comes to chasing down late payments, it takes manually-oriented companies 67 percent longer to follow up on overdue payments.

The pandemic has exacerbated the problems tied to chasing down payments, as 45 percent of companies said that payment collections had become more difficult. Late payments and delays have buffeted businesses during COVID-19, with the average DSO increasing from 39.7 days to 42.6 days.

To get a bit more granular, the average collection cycle for firms with no or very little automation is 31 days, and they take an additional 24 days to follow up on late payments. Firms that have moderately to highly automated AR processes have an average term of 24 days and take only 16 days to follow up.

The problem is a global one. In the U.K. alone, the Federation of Small Businesses has estimated that as many as 50,000 small businesses shutter each year due to late payments – at a cost of $30 billion. Roughly 4.6 percent of companies have seen terms stretched beyond 90 days (for outstanding payments due) in the U.K.

And, as estimated by studies detailing European trends, as many as 80 percent of companies say they have taken lengthier payment terms than they would have liked.

…But Automation Offers Some Silver Linings 

And yet, there may be some silver linings. PYMNTS and American Express found that 64 percent of companies surveyed are shifting away from physical invoices, and a full 60 percent of companies are preparing to automate their AR systems.

The majority of respondents, at least two-thirds of them, state that automating some back-office functions can speed up workflows tied to invoicing and collection, and can improve overall team efficiency. Drilling down, those time and cost savings are motivating 76 percent of healthcare firms to prep tech upgrades, and roughly 73 percent of companies we surveyed in the energy sector to tackle such overhauls.

For accounts receivable, then, out of the ashes of crisis … come some (digital) green shoots.