The late payment culture: AR secrets revealed
In this paper, we will examine the culture of late payments. A recent study conducted by MasterCard found that 74 percent of business owners and employees think late payments are a fact of business life and will always happen, and 57 percent of those surveyed acknowledged that they had actively delayed payments to their suppliers in the last 12 months. Another report released by Euler Hermes corroborates the late payment trend: their Payment Behavior Index for 2015 revealed a 6.4-point decrease in on-time B2B payment behavior in the U.S. from 67.2 to 60.8 (where 50 indicates average payment behavior).
Perhaps most concerning is the directly proportional relationship between payment behavior and GDP. Given the strong correlation, it stands to reason that late payments, while potentially beneficial to buyers in the short term, have a negative impact on the broader economy. The impetus behind this “Late Payment Culture” can be attributed to cash flow. In the same way accounts receivable (AR) teams strive to lower Days Sales Outstanding (DSO), their accounts payable (AP) counterparts seek to increase their Days Payable Outstanding (DPO) in an effort to maximize working capital.
In a perfect world, suppliers and buyers would strike the perfect trading terms, allowing both parties to reach the best possible DSO and DPO. Unfortunately, that usually isn’t the case, as buyers typically have most of the leverage—they’ve already received the goods or services,
more often than not, the financial penalties incurred from making late payments fail to outweigh the time value of money-on-hand.