Why On-Time Bill Payment Matters: 3 Ways Late Payments Can Hurt Your Business

Don’t be that customer: the one vendors are always tracking down and negotiating late payments with. When your business is growing or struggling, on-time payment to vendors is the last thing on your mind. But on-time bill payment, accurate accounts payable tracking and vendor relationships can be just as crucial to your business’s future and bottom line as revenue and happy customers.

You are focused on generating revenue, collecting your receivables, and getting product or services out the door. Paying an overdue invoice to your bookkeeper or landlord may not seem like a priority or a big issue. If you are tight on cash, you may hold off responding to a couple of emails to wait for inbound revenue. If you don’t say anything, your vendor may not notice and you get a little extra time to fund the payment, right? Not quite. There are three big problems with this stance.

First, there is the legal issue. An account payable is a contract to pay. And on time payment is part of that contract. The contract or invoice states the time limit you have in which to pay a vendor—anywhere from due on receipt to 30 days for most small business vendors. This contract is a legally binding agreement; if you don’t pay, they can sue you.

Most vendors have a specified period of time they wait before legal action. Legal action can include sending the invoice to a collections agency, which negatively impacts your credit or a letter from their counsel requesting payment and threatening court involvement. Excellent communication and timely accounts payable management is a good way to prevent legal action.

Second, there are monetary penalties. Legal action is not the only negative outcome. Many contracts, especially utilities and rental agreements, have penalties for late payment. These penalties can add up to significant sums over time. Especially when funding it tight, it's critical to keep a clear picture of accounts payable and any late penalties.

I’ve had many clients that have received notices of overdue bills and had no idea they were behind on payments. Keeping track of what you owe and when it is due is essential. If you or your accounting staff are crunched for time, try using an automated bill entry system like Bill.com. There is nothing worse than paying late fees—not because you didn’t have the funds, but because you weren’t tracking the billing cycle accurately.

Third and most important, is vendor relationship management. If financial and legal action isn’t enough to persuade you to keep an eye on accounts payable, then let’s talk about something a little more personal: relationships.

Here is the dirty secret about your vendors; they are human, and they have businesses to run just like you. You would do anything for that client who writes sizable checks and pays Johnny-on-the-spot, wouldn’t you? Your vendors aren't any different.

You might move your Johnny-on-the-spot up in priority for deadlines and special last minute requests—quicker return to your business on your time investment, right? You might give them a larger credit line because you know they will pay on time. A good vendor will not provide poor customer service, but consistently late bills may be the difference between good customer service and the larger line of credit you need in a pinch.

Good relationships with vendors are essential. Your vendors are the key to your growth.

If you pay bills on time or explain (and apologize) when you don’t or can’t, you are far more likely to get that favor when you need it. If there isn’t a cash crunch and you are simply busy, then it is time for you to invest in better accounts payable management options. The stretch order that’s beyond your credit limit for a big event or a reduced price on a one-time large order is much more likely to be approved for a client in good standing with the accounting department. That's the hard truth.

Side Note: If you ask a vendor for a favor and notice hesitancy where you expected enthusiasm, check your day's payable record with that vendor. Late payments may be negatively impacting the relationship. Or you can ask the vendor what your record for payment is. There is a good chance they are tracking your late payments very closely.

For an assessment of your accounts payable management email blair@relieffinancialconsulting.com for a consultation.