Recent research conducted by Loudhouse on behalf of Basware and MasterCard shed light on an interesting conundrum facing businesses today. Namely, that a vast number accept late payments as a fact of business life, while at the same time opting to hoard cash in the bank, rather than investing in new opportunities or paying on time to reap early payment benefits.
The result? Economy congestion. Limited investment and hampered growth.
Despite nearly seven in ten of the companies (69%) surveyed admitting to using late payments as a strategic lever to hold on to cash reserves, they recognise the practice is detrimental on many levels. Not only does it make forward planning harder, it can cause specific financial difficulties, including payment of salaries and suppliers. Ultimately, the ecosystem suffers.
Interestingly, two thirds of suppliers are so desperate to get paid on time, they are willing to accept substantial discounts to ensure early payment. The average discount is 8%, but some are willing to go as high as 50%! Yet this ‘discount panic’ does the economy no favours – it diminishes the value of products and services and limits business and economic growth.
Times have been tight in recent years, but this is clearly not a cash issue, as 40% of the businesses we surveyed said they have more money in the bank than a year ago. A full quarter of respondents qualify as 'cash rich' – with 20% or more cash as a proportion of total assets. Yet in a nod towards this ‘cash arrogance’, a third have no stated objective to generate value from these cash holdings, meaning the money is effectively stashed under the proverbial corporate mattress.
It has been said that organisations can make two mistakes during times of financial turmoil. The first is not recognising when such periods have started, until too late; and the second is not recognising when they have ended.
Sitting on a hoard of cash that is doing nothing for a company or organisation, while also delaying payments, is not only morally questionable, it's simply bad business practice. Whatever the circumstances, the ultimate goal of any organisation is to build on a foundation of a proactively managed, effective financial position.
Cash-rich companies thinking they are immune from wider problems may be making a false economy. Firstly, they are missing an opportunity to use their cash more intelligently, to earn more money or invest in the business. Secondly, while they may use their cash position to impress investors, their supply chain may be about to fall apart if suppliers aren’t getting paid – and this would have drastic consequences for the business.
Ultimately, financial decision-makers should take a proactive role to ensure that cash is put to work in the most effective manner, whilst minimising the traditional risks of poor cash planning.
It's worth noting that it's not just reluctance to relinquishing cash reserves that is preventing early payment – process bottlenecks are a clear problem too. Only a fifth of organisations have a highly automated and optimised payment system in place, with over half believing internal bottlenecks prevent them from taking advantage of early payment discounts. As such, there is an important role for the intermediary processes that surround payment.
The importance of intermediaries has increased due to globalisation and automation. Payment processes and credit facilities are tools to mitigate the risks of inertia, energising the flow of funds between buyers to create flexibility in the payment supply chain.
Options exist for improvements to existing practices and processes, particularly to take into account the more ecosystem-based approaches that have emerged in the world of supply. Basware Pay is one such new paradigm – faster payment on approved invoices, better visibility of good quality data for decision-making, and greater trust between buyer and supplier.
To avoid being left behind, organisations need to break away from their traditional approach. Whilst this is not easy, the alternative is to continue using an increasingly blunt set of instruments – not least discounting and delaying payments – that squanders the opportunity to make the most of what new payment models can offer.