The billing cycle of 90% of companies today is often the same: from the execution of the service – sometimes preceded by a request for a deposit, to the invoicing through the beginning of an interminable wait for the payment to arrive (under 30, 60 or even 90 days). During all this time, the contractor will have no other option than to regularly check his business bank account and constantly remind his client whether the payment has been made. This system, apart from being extremely stressful and time-consuming for the entrepreneur, poses several problems directly related to the survival of the business itself.
Unbearable pressure for the entrepreneur
The first victims of this system are the entrepreneur and his company. It is important to understand that when an invoice is not paid quickly or not paid on time, the creditor company finds itself in a precarious situation. Its cash flow is weakened because, like any company, it regularly has fixed expenses to pay (premises, equipment, employees, etc.). A cash flow gap can therefore quickly jeopardize a company that does not have sufficient reserves to absorb this payment delay.
The lack of cash flow is one of the main causes of business failures. For start-ups, it is even the second most common cause of failure, with 29% of companies closing down due to lack of cash.
When there is a gap between the company’s cash outflows (expenses and charges it pays to continue its business) and cash receipts (the money that comes in when a customer pays an invoice), the company has a cash requirement called Working Capital Requirement (WCR). This WCR represents the minimum level of cash that the company must always have on hand to be able to meet its expenses while waiting to be paid. The longer it takes to pay invoices, the greater the working capital requirements. And it can be difficult for a company to always have enough cash to meet its needs. This fragility constantly raises the question of the company’s sustainability. A handful of late payments can at any time tip the company into a critical situation where closure may even be considered.
This is a constant stress for the entrepreneur, who is never fully protected until he has significant cash reserves. In addition to this constant pressure to survive, there is also the issue of the entrepreneur’s responsibility to his staff. If a company is significantly behind in its payments, it may find itself unable to pay its employees’ salaries.
This failure to pay will have serious consequences for the personal lives of the company’s members and will often force the entrepreneur to lay off part or all of the team. The current way of operating places a heavy burden on the shoulders of the entrepreneur. And it is also harmful to the company as a whole because it will reduce its growth potential.
A brake on the company’s growth
Faced with this constant uncertainty, the solution for the prudent business owner seems to be to accumulate reserves. More specifically, reserves that are sufficiently large to cover several months of expenses in the event of major delays in payment. But this strategy has several pitfalls. First of all, it will be extremely complicated to accumulate sufficient reserves because many companies operate with a limited margin. Once all expenses are paid, they do not have enough funds left over to set aside. The problem with this strategy is that it slows down the growth of the business tremendously, if not completely. If a company uses a large portion of its profits to replenish cash flow in case of late payments, it does not use it to invest in business development and profitability improvement. It does not hire new employees, it does not try to innovate, it does not dedicate a budget to R&D, it does not modernize its equipment to be more efficient, etc.
By playing it safe in order to protect itself against payment delays, it therefore lends itself to all its competitors who will execute more quickly, develop more aggressively and take more market share. The cautious company therefore finds itself either surviving or being completely overtaken by the competition.
So the lack of visibility into the progress of payments forces a complicated balance between security and business growth. And it will also push the company to send numerous reminders, the direct and indirect costs of which will further increase the burden of payment deadlines.
A source of costly, time-consuming and inefficient reminders
The reminders, emails, phone calls or even paper reminders, will have two negative consequences. First of all, they will immobilize a resource within the company for a task with little added value.
Whether it is the company manager himself or a dedicated employee who takes care of the reminders, it is “man-time” used inefficiently when it could be allocated to higher value-added activities. Moreover, reminders also pose the risk of straining exchanges and deteriorating the customer relationship. This will be the case, for example, if the payment has been made but has not yet been registered by the company’s bank. The dunning customer may, depending on their relationship with their creditor, take exception to the dunning and have a bad customer experience, which may prevent them from using that company again for a future transaction.
In summary, the way payments are handled between companies today has a huge impact on the stability and growth of companies. The tools and systems an entrepreneur puts in place to manage customer payments have a key role to play in the development of their business. The first step is to understand what kind of tools can meet these needs and what they can improve in the management of his business.