By Andrew Erkins, Digit

Andy Warhol once said, “Business is the most fascinating kind of art,” and I agree. There’s an effortless simplicity to business when everything is in flow. A business in full flight is breathtakingly beautiful.

Consider the mechanics for just a moment.

You have a product or service. Customers want that product or service and you provide it to them, in exchange for money. That money then goes into paying the people and businesses who help you do what you do. What’s left is your reward for doing business or is used to provide new customers your products or services. Everyone wins.

When that timing and flow is interrupted, it’s like a spinning top that gets knocked. It goes from perfect balance to wobbling. You wait for that moment when it loses its balance just enough to career out of control and topple over.

Ripple effect

Xero’s latest Small Business Insights explore the ripple effect that late payments have on that delicate balance. The impact is profound. Businesses that are paid slower than average (18-35 days depending on industry), grow a third slower than those paid faster than average. And they tend to pay their suppliers more slowly – 8 days slower.

Indeed, a lot is made of the financial impact to business when things don’t go to plan, and the maths is pretty simple.

When customers don’t pay on time, cash flow dries up. Businesses are at greater risk of not paying their obligations when they fall due. Their ability to grow is stunted. And they put mechanisms in place to work around what should be the simplest part of doing business. These include debtor funding, invoice factoring, payment services, debt collection, overdrafts, payment plans. All of these tools exist to either bridge or shorten the cash flow gap and manage business risk.

As an advisory firm embedded in the businesses we support, we see another side to things. The day to day side, and the human face to the business equation that can be overlooked among the numbers

Tell-tale signs of trouble

You see, a business with cash flow issues has a specific fingerprint when you look at a set of accounts. And it differs from a fingerprint of a business that is thriving. Struggling businesses tend to rely on credit cards and debt. They have a large number of overdue invoices. They have payments being made randomly rather than in scheduled batches. They often pay what they can, enter payment plans, or make poor financial decisions

From an accounting perspective, it’s a lot of noisy transactional data. There is no sense of flow.

This requires additional management to ensure the accounts don’t get messy. Extra administrative time and costs aren’t factored into the business model, nor are the additional conversations and management decisions required.

In turn the business owner is then required to:

  • Make a call on whom to pay and whom not to 
  • Have hard conversations with customers to chase up payments or even cut them off
  • Eventually decide whether to take more formal action or write off the debt
  • Defer payments with suppliers, negotiate payment plans, or make cuts to the business to manage its cash flow
Emotional toll

Employees, meanwhile wonder about the stability of the business and what it means for their job and their families. And suppliers paid late, in turn, are impacted, and potentially make decisions that affect yet more people.

There is a real human face to business, and the ripple effect of late payments is more than just numbers. More than bits of paper. More than impersonal decisions. Take note big business!

There is an emotional toll that it takes on the people within a business. A hidden psychological price unacknowledged. Being in business goes from what could be effortlessly simple and a beautiful experience to one more thing to juggle. 

Let’s hope that big businesses – and big government — take notice of the problem documented in Xero’s special report “Paying the price.” By working together, we have the potential to solve the problem of late payments to Australian small businesses by remembering that what underpins business isn’t just numbers but people – for whom late payments have a very real impact..

The above article represents the opinions of the guest contributor and does not necessarily reflect the views of Xero.

Andrew Erkins is a founder of Digit in Perth. He has made a career out of helping businesses get the most from technology – whether through marketing, websites, or streamlining their accounting and processes via clever integrations and apps.