Stephen Carter, Director of Payments Strategy at Ivalua
Facing soaring energy prices, many UK businesses are being left out in the cold. Despite the UK Government recently outlining plans to help reduce energy bills for businesses, firms are still struggling to foot these rising bills.
Coupled with issues such as the war in Ukraine, COVID-19, and Brexit, businesses are struggling to keep the lights on, so being able to use payments strategically and keep cashflow moving is critical. However, as a difficult winter approaches, many firms are failing to pay suppliers promptly – which is damaging supplier relationships, making it harder to unlock new revenue streams, and ultimately preventing businesses from using payments strategically.
The late payment problem
Recent research revealed that 36 percent of UK businesses have had to extend their payment terms to suppliers in the last 12 months.
Late payments are exacerbating tensions in already strained supply chains. Paying suppliers late slows up cashflow and causes further late payments down the line, creating a vicious cycle for businesses. Delayed payments can have a detrimental impact on the supplier-buyer relationship, as suppliers are far more likely to prioritise firms that pay them promptly. This can even cut ties with key suppliers, as 59 percent of UK businesses say suppliers have ended relationships due to repeated late payments.
While businesses recognise the strategic value of payments to help ease cashflow concerns and bolster supplier relationships, many are struggling to unlock this value as they have a severe lack of visibility into payments. This makes it hard to enforce quality or milestone based contracts, and firms often end up paying for goods and services that never arrive. Late payments are threatening to sever relationships with suppliers at a time when a strong supply chain is more critical than ever.
Using payments strategically to reduce financial risk
During the energy cost crunch, businesses must take a strategic approach to payments – and this starts with improving visibility into supplier payments. By modernising payment processes, businesses can unlock real-time payment visibility and execution, making it easier to forecast cash needs, see whether suppliers have received payments, and ensure that suppliers are paid on time.
Businesses have more opportunities to use payments for competitive advantage, rather than for simply keeping their heads above water. Research shows that 79 percent of UK businesses said that suppliers are more likely to collaborate with firms that pay them on time. Firms that strive to maintain a collaborative relationship with suppliers – even during tough times – will find themselves at the ‘front of the queue’ when supply disruption bites. As businesses feel the pinch of the energy crisis, they must ensure that they are paying suppliers promptly to build strong supply partnerships.
To drive supply continuity, many businesses are finding more strategic ways to pay. For instance, some are staggering payments throughout different project milestones to ensure that suppliers are paid on time. Not only does this help to improve the supplier-buyer relationship, but it also helps to keep projects on track, secure the delivery of goods and services, and identify new revenue streams. Some businesses are also bulk-buying goods up-front to help reduce costs, provided that additional inventory costs remain under control.
Other businesses are also adopting an early payments scheme, where the customer pays less than the full invoice amount if they pay earlier than the invoice payment date. This helps businesses to gain favour with a supplier, helping to lower the cost of goods and services or securing them at a time of short supply – ultimately cementing their position as the customer of choice.
Keeping the lights on
Firms are fighting the tide of rising energy costs, which could have a disastrous impact for businesses across the UK – particularly for smaller businesses that could be put at risk of collapse. Businesses need to do all they can to mitigate the impact of the energy price hikes and protect their bottom line.
Late payments are adding to businesses’ financial woes while they’re already battling with soaring energy bills and the ongoing cost of living crisis. For supply chains to survive this difficult winter, businesses must ensure that they pay their suppliers on time, collaborating with them to identify cost savings and unlock new revenue streams, and drive operational efficiencies to minimise financial risk – putting everyone in the best position to weather the storm ahead.
