(originally published here)
1 in Every 3 Invoices Unpaid Is Due To Seller Errors. Seriously?!
“The formulation of a problem is often more essential than its solution.” Albert Einstein
That’s just a fancy way of saying unless you understand the problem, you can’t really reach a solution.
Pursuit of an Objective Answer
Whenever we talk about late payment among B2B SMBs or startups, the usual story which builds up is one which portrays the buyer as either evil, greedy, or inept (covered here & here).
As the tale usually goes, buyers are either so poorly organized that they can’t clear their supply chain debts in time because they can’t see the received invoices among the dozens of piles of the same. Or they don’t want to pay on time because they’re too busy cash hoarding and making more money off the interest.
But, is that an accurate summation of the state of late payment among B2B SMBs and startups as a whole?
When we last interviewed Mr. Sridhar Subramanian – finance veteran of two decades and former CFO of Capillary Technologies – for our “An Evening with a CFO” series (Part I, Part II, Part III), we saw an alternate picture emerge.This perspective was then backed by other CFOs of mid-sized Indian SMBswhom we spoke to in order to further strengthen the Accounts Receivable segment of our product.
Seemingly, mid-sized Indian SMBs were more concerned with paying their suppliers on time to maintain better relationships along the supply chainthan they were with cash hoarding, for three reasons:
- Unlike larger conglomerates or corporate organizations, SMBs have lesser capital in the bank on which to accrue interest. In a cost-benefit analysis, the advantages of keeping one’s suppliers happy outweigh the comparatively smaller interest pay-out in the long-term;
- In contrast to larger organizations, gaining a reputation of late payment in an Indian SMB is usually directly linked to the credibility and business practices of the entrepreneur-founder or the CFO. Fixing a reputation of non-payment is nigh on impossible in a business community once word spreads;
- As opposed to popular view, it’s not easy for mid-sized SMBs to simply up and change suppliers in their supply chain. In fact, for the period in which such change is happening, work invariably slows down and the buyer incurs significant dips in expected profitability to find a suitable replacement. Not to mention, people you’ve done business with steadily for longer are more likely to show loyalty and prioritize your needs should such leeway be required.
Now, these might not be the most morally squeaky-clean reasons for buyers to defend their perspective on the list of reasons behind B2B late payment among Indian SMBs and startups. But they are practical ones.
Yet, without objective proof, how could we decide who deserves the lion’s share of the burden in late payment – the buyers or sellers? After all, the bulk of the damage of this phenomenon is borne by the seller SMBs and startups themselves. And the comparatively unified perspective of CFOs in larger B2B SMBs can also be attributed to a form of victim-blaming in order to protect their reputation.
So, objectively speaking, how could we ascertain the reality of the situation?After all, it’s not like buyers and sellers would give us access to tens of thousands of invoices for us to analyze and catalog the reasons for late payment as seen in the evidence.
Well, it seems we won’t need to – someone else has done just that.
TermSync Invoice Analysis
In 2013, probably chasing the same answers that we are now, a firm in the US named TermSync surveyed 100 CFOs & other accounting executives. In addition to that, they also performed an analysis of 10,000 invoices which were more than 30 days past due, from companies with revenues between $30 million and $200 million.
The result? Only 40% of late or non-payment situations were because of the buyers. Among them 13% went unpaid or were paid late because of defective products, while 27% were due to the buyer’s monetary shortfall.
In the rest, a staggering 49% of overdue accounts receivables were unpaid because of erroneous or missing purchase information on the invoice. And finally, in 11% of the cases, the invoices were either generated far too late, sent to the wrong person in the organization, or not sent at all.
With a clear 60% of the burden of non-payment sitting squarely on the shoulders of the sellers, the verdict is in – sellers who make errors in billing their clients are slightly more at blame for late payment than buyers who don’t wish to pay their suppliers.
So What Does This Really Mean?
Well, if you simply look at it in percentages, 40% and 60% aren’t significantly far off from each other. It’s not particularly a surprise either that two parties in a business transaction are somewhat equally responsible for the delay or non-payment of compensation for work done.
On the other hand, 1 in every 2 B2B SMB invoices (53.5%) in India is paid late. Overall, 97% of Indian B2B SMBs experienced late payments last year.
This means that 1 in every 3 (32.1%) B2B SMB invoices generated in India is either paid late or left unpaid because of invoicing errors by the sellers themselves! Consider that number, and the colossal sum of money it represents.
In Closing: 1 in Every 3 Invoices Unpaid Due To Seller’s Errors? Seriously?
Well, it’s abundantly clear that buyers and sellers are somewhat equally responsible for late payment situations – though sellers are slightly more responsible for their own cash flow problems according to these numbers than their “evil, non-paying” clients.
However, to put a monetary cost to these errors – according to Factors Chain International, the total factoring (wherein SMBs sell their invoices to factors at a discount to avail some desperately needed cash flow) volume in India in 2014 was at least around $5.2 billion. This figure excludes unregistered informal monetary lenders, private invoice financiers, as well as bill financing undertaken by banks.
And at least 60%, or $3.12 billion worth, of these factoring transactions could have been avoided if the sellers had but ensured that the most common errors in invoicing had been avoided. Not to mention the monetary costs to these businesses of providing the discounted rates, or the economic burden of billions more of unpaid invoices which either string along for 90-120 days while the seller’s business struggles to keep their doors open, or which are simply written off as bad debts.
However, well-researched though it may be, our perspective on this matter represents but one voice.
So let us know what you think about this subject in the comments section below. How often have you caught errors created by your employees?
Would the semi-automation provided by features such as Hummingbill Collect’s new In-Gmail E-Invoicing tool help reduce such errors, in your opinion?
Have you ever seen trends in the kind of mistakes which are most prevalent? What has been your honest experience regarding this subject – Is it more often your employees’ fault or your clients’ when you’re paid late or an invoice gets rejected?