Cash flow issues plague IT companies due to late payments

Data provided by MarketFinance has suggests that IT companies are suffering from late payment of invoices. MarketFinance examined over 8,000 invoices to collect its findings.

The analysis suggests that businesses typically agree 45-day payment terms from completion of work or delivery of goods. Despite this, 40% of invoices issued in 2019 were paid late, an increase from 36% in 2018. Strikingly, the number of days an invoice was paid late almost doubled in 2019 to 23 days from 13 days late in 2018. Invoices paid late were typically larger in value (£30,838) than those paid on time (£20,868).

Long payment vs Late payment.

There is a distinct difference between these terms. Long payment terms refer to the time contractually agreed between parties when invoices will be settled for goods and services provided. Whilst sometimes lengthy, they are a reality of doing business. Businesses can plan to cover these cash flow gaps and manage their working capital using either cash reserves or finance tools like invoice finance. Late payment refers to the additional time taken to settle invoices, outside of those contractually agreed at the point of purchase. This is an unknown and unexpected element which can significantly impact cash flow, business plans and even in some cases paying staff or creditors.

Late payment trends have steadily improved over the years for IT businesses but 2019 signalled a shift where more invoices were being paid late and taking longer to settle. This table illustrates the historical trends:

Year % of invoices being paid late Average value of invoices being paid late Average number of days being paid late
2013 87% £69,211 15
2014 83% £54,344 16
2015 80% £39,860 18
2016 54% £29,313 15
2017 45% £37,674 14
2018 36% £30,408 13
2019 40% £30,838 23

Bilal Mahmood, External Relations Director at MarketFinance, commented: “The IT sector plays a crucial role in our economy, employing over 1 million people in the UK. These are businesses that build the infrastructure driving industry to outsourced tech and telecoms businsesses serving our SMEs. With payments going well beyond the already lengthy agreed terms, businesses effectively end up waiting up to 68 days, on average, to be paid. This will undoubtedly impact these growing sectors, affecting their payroll, supply chains and general financial wellbeing.”

“It’s unfair for businesses to have to wait to be paid beyond what is agreed. Late payment practices harm business cash flow, hamper investment and, in extreme cases, can risk business solvency. Government measures such as the Prompt Payment Code and Duty To Report have helped create awareness but need more bite. Until this happens, there are ways for SMEs to fight back against the negative impact of late payments, from having frank discussions with debtors that continuously fail to adhere to agreed payment terms, to imposing sanctions on those debtors, or seeking out invoice finance facilities to bridge the gap.”

Bilal Mahmood added: “SMEs owners have come to expect long payment terms but late payments are inexcusable. For every day an invoice is late, it’s more time spent chasing payment. This means less time for business owners to focus on growing their business, coming up with innovative ideas and hiring more people, or just paying their staff and bills. Things need to change quickly.”

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David Dungay

Editor - Comms Business Magazine