What No One Will Tell You: How Top Companies Predict Payment Delays and Win Big

Introduction

Technology firms are at the forefront of innovation, pouring resources into market research, development, and penetration strategies to outpace rivals.

Cash flow is a central pillar in this dynamic, essential for sustaining growth, covering operational costs, and navigating volatility. Yet, managing it effectively proves challenging for many B2B tech enterprises, marking a crucial area for mastery.

The primary hurdle? Delayed payments.

This article tackles the intricacies of delayed payments in B2B transactions, examining their effects and the measures top technology companies implement to anticipate and address customer payment tendencies. 

Payment Delay Landscape

The payment delay landscape is a complex terrain. 

Consider this: according to a survey conducted by Atradius, over 55% of B2B payments in the US were delayed in 2023, an 18% increase from the previous year’s value of 47%.

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Of these, over 9% have been written off as bad debts, a 50% increase from 2022.

Common payment delays are not simple administrative hurdles—they significantly impact cash inflow and day-to-day operations. 

Causes

Client Financial Difficulties

Financial instability among clients is a primary catalyst for payment delays. In challenging economic times or poor financial management, firms need help meeting their payment obligations.

A LinkedIn study states customers will likely delay or reduce payment frequency during a cash flow crunch. In parallel, suppliers demand faster payments or levy charges for late payments, giving rise to a double-edged sword.  

Atradius’ report emphasizes the correlation between economic downturns and increased payment delays, underlining businesses' vulnerability to their client's financial health​​​​. The ripple effects of such financial difficulties exacerbate suppliers' cash flow problems, highlighting the interconnected nature of modern business ecosystems.

Client Payment Processes

In light of Paystream Advisor's findings, it's notable that over 50% of companies experience a significant delay (from 10 to 25 days) just for invoice approval.

This is a critical factor, especially when juxtaposed against the backdrop of the average payment term set by companies in 2023, which stands at 35 days. 

The gap between invoice approval time and payment terms reinforces a crucial inefficiency in the client’s AP (accounts payable) process. Such delays in the initial approval phase consume a substantial portion of the payment window, leaving a narrower margin for payment processing and collection. 

This bottleneck strains a company's cash flow, as the waiting period for incoming funds extends far beyond the intended payment term. 

Moreover, this lag in the approval process suggests inefficiencies or complexities within internal procedures, ranging from overly bureaucratic approval hierarchies to inadequate use of technology in managing invoices.

Invoicing and Collection Inefficiencies

Inefficiencies in invoicing and collections processes significantly contribute to payment delays. These stem from outdated or manual systems prone to errors, lack of clear payment terms, or inefficient communication channels between the creditor and debtor companies. 

Invoice and Contract Disputes (or Escalations) 

Disputes over invoice details and contract terms are another common source. 

These can come from product or service discrepancies, contract term misunderstandings, or pricing disagreements. 

Resolving these disputes can be time-consuming, requiring extensive communication and negotiation to reach a resolution that satisfies both parties. The Payment Practices Barometer report (linked above) highlights the impact of contract disputes on payment times, with businesses often needing to embark upon complex negotiations to recover owed amounts​​.

A Large Number of Credit Sales

This phenomenon occurs when businesses extend credit to their customers, allowing them to purchase goods or services on account and pay for them at a later date, with payment terms such as NET 30, 45, or 60. 

Nearly all businesses polled for the Barometer report mentioned they anticipate a surge in demand and sales during 2024 and beyond. 

While offering credit can boost sales by making purchases more accessible to customers, it also exposes companies to increased risks of payment delays. Because of delayed payments, the terms granted to customers have been shortened by a week, going from 42 days in 2022 to 35 days in 2023.

Impact 

Chasing Overdue Invoices

When payments are delayed, companies allocate considerable time, costs, and resources to chasing overdue invoices. 

This not only diverts staff from their primary responsibilities but also incurs additional expenses related to follow-ups and legal actions. 

Strengthening Internal Credit Control Processes

Companies are prompted to strengthen their internal credit control processes in response to the challenges posed by payment delays. This includes rigorous credit risk assessments, receivables monitoring, and stricter credit terms. 

These measures, while necessary, require investment in training and technology, which will increase operational costs. However, prompt credit control can significantly mitigate payment delay risks and help the company manage its credit exposure. 

Delaying Payments to Own Suppliers

One of the direct consequences of payment delays is delaying supplier payments. 

While offering temporary relief in cash flow management, this practice can strain relationships and lead to higher costs of goods sold or services rendered due to late penalties or lost discounts for timely payments. It can also trigger a domino effect, where the payment delays cascade through the supply chain, affecting numerous businesses.

Seek External Financing

Businesses often seek external financing, such as trade credit, bank loans, equity capital, and invoice factoring, to bridge the gap caused by delayed payments. In the US, 60% of companies opt for trade credit, while 52% rely on bank loans. 

While external funding can provide the necessary liquidity to cover operational expenses, it also induces additional interest costs. Over-reliance on external financing can lead to an increased debt burden, impacting the company's credit rating and financial flexibility in the long term.

Delay in Paying Bills and Staff

Payment delays can force businesses to delay their payments, including essential bills and staff salaries. 

Delaying bill payments can result in service disruptions, additional fees, or damage to the company's creditworthiness. Delaying staff salaries can demoralize employees and potentially lead to turnover, further increasing the company's operational challenges.

Predictive Strategies for Managing Payment Delays

Companies are increasingly turning to predictive strategies that leverage data, technology, and communication to effectively manage the challenges posed by payment delays. 

Firms can proactively manage their AR processes by anticipating payment delays before they occur. 

• Utilizing AR Data to Identify Payment Behavior Patterns: Advanced data analytics enable companies to sift through vast amounts of AR data to identify trends and patterns in payment behaviors. They can pinpoint which clients are more likely to pay late, during which periods payment delays occur more frequently, and which invoices are at higher risk of being unpaid. 
• Using Machine Learning Models to Predict Payment Delays: These models can assess the likelihood of payment delays for each invoice issued, considering various factors such as the client's payment history, economic conditions, and the nature of the transaction. Predictive models help businesses prioritize their collection efforts and customize their credit terms to reduce the risk of future delays. 
• Evaluating the Creditworthiness of New and Existing Clients: Credit risk assessment is crucial in determining the financial stability of both new and existing clients. Companies can gauge the risk of extending credit by evaluating the credit history, economic health, and market conditions relevant to each client. This evaluation is essential for making informed decisions about credit terms and limits.
• Implementing Dynamic Credit Limits Based on Real-Time Risk Assessment: Dynamic credit limits, adjusted based on real-time assessments of a client's creditworthiness, offer a flexible approach to credit management. As a client's financial situation changes, so does their credit limit, helping mitigate risks associated with payment delays. This strategy requires continuous monitoring of clients' financial health and swift adjustments to credit policies as needed.
• Building Relationships with Clients to Understand Their Payment Processes: Establishing solid relationships with clients is invaluable for understanding their payment processes and preferences. By engaging in open dialogue, businesses can gain insights into potential hurdles within the client's payment cycle that could lead to delays. This understanding can facilitate the development of mutually beneficial payment terms that minimize the risk of late payments.
• Engaging with Clients Showing Signs of Payment Delay: Proactively engaging with clients who show early signs of potential payment delays can prevent issues from escalating. Early engagement involves reaching out to clients before their invoices are due, discussing potential barriers to timely payment, and exploring solutions such as payment plans or adjustments to payment terms. This approach helps manage payment delays and reinforces trust and commitment between the business and its clients.

Organizational Best Practices

Organizations must adopt comprehensive strategies to mitigate the impact and maintain cash flow when dealing with payment delays. Best practices include forming cross-functional teams and focusing on training and development. These approaches enable businesses to handle delays effectively, maintaining financial stability and strong customer relationships.

Cross-Functional Teams

Creating cross-functional teams is crucial for managing payment delays. These teams bring together professionals from finance, sales, customer service, and other relevant departments. Their diverse expertise allows for a holistic problem-solving approach, ensuring all payment delays are addressed efficiently.

• Improve Communication: Cross-functional teams facilitate better communication across the organization. This ensures that all departments understand the importance of timely payments and their role in minimizing delays.
• Identify Root Causes: These teams are well-equipped to analyze the reasons behind payment delays. By understanding the underlying issues, whether internal processes or customer-related challenges, they can develop targeted strategies to prevent future occurrences.
• Develop Strategic Solutions: Leveraging diverse perspectives, cross-functional teams can devise innovative solutions to manage and prevent payment delays. These may include revising payment terms, improving billing processes, or enhancing customer education about payment expectations.

• Implement Process Improvements: Cross-functional collaboration allows for the rapid implementation of process improvements. Teams can quickly identify inefficiencies in the payment process and make necessary adjustments to streamline operations.

Training and Development

Investing in training and development is essential to equipping team members with the skills and knowledge they need to manage payment delays effectively.

• Enhance Skills: Regular training sessions help staff improve their negotiation, communication, and problem-solving skills. These competencies are vital in addressing payment delays tactfully and efficiently.
• Best Practices: The financial landscape is constantly evolving. Training programs provide employees with the latest best practices and technological advancements in payment processing and accounts receivable management.
• Proactive Culture: Organizations can cultivate a proactive mindset among their employees through development initiatives. This encourages staff to anticipate and address potential payment delays before they escalate.
• Customer Service: Training in customer service excellence is crucial for dealing with payment delays. It enables staff to handle sensitive conversations empathetically and professionally, maintaining positive customer relationships even in challenging situations.

Payment Delays and Technology

In addition to operational improvements, companies can utilize accounts receivable software solutions that provide enhanced automation, visibility, and collaboration capabilities. 

AR process automation goes beyond basic invoicing and payment reminders. Advanced software solutions offer features to help companies proactively predict delayed payments and act on them.

• Predicted Payment Date: Accounts receivable software can help predict when an invoice will likely be paid using factors like past payment behavior and customer demographic information such as industry, region, or country. This capability enables finance teams to identify risky accounts and predict the pay dates of invoices with greater accuracy.
• Account Health Score: AR solutions also help predict the risk of payment delay at an account level by assigning scores. The scores automatically increase when customers are prompt with their payments and decrease when they don’t. 

• Collection Strategies: Collection agents can segment customers into long-tail, high-value, or low-risk accounts and create different strategies for each, saving time. This also leads to a more personalized, efficient, and customer-friendly collection process. AR managers get complete visibility into their performance and can change the strategy or their owner on the fly.
• Complete Visibility: Collectors and AR managers get full visibility to understand the reasons for delayed payment. They can view whether an account has an open dispute or escalation and whether they have given a promise-to-pay (PTP). 
• Multi-Stakeholder Context: Integrating AR systems with CRM software ensures that all customer-related information is consolidated in one place. This unified view includes transaction histories, communication logs, and payment behaviors, enabling businesses to gain comprehensive insights into their customer base. Sales and customer service teams can use this information to tailor their approaches if they have to be involved in the collections process. 
• Collector’s Dashboard: Within AR software, a collector’s dashboard is designed to optimize the collections process by organizing workload, highlighting high-risk accounts, and tracking customer communication. Features include automated reminders, customizable communication templates, and performance tracking against set targets. By centralizing this information, collectors can work more efficiently, focusing their efforts where they are needed most and improving their success in reducing outstanding receivables. 

Future Trends in AR Management

AR future trends and innovations are poised to revolutionize how businesses manage their receivable processes, enhancing efficiency, accuracy, and speed.

Emerging Technologies in AR Management

• AI/ML: Artificial intelligence and machine learning are at the forefront of transforming AR management. These technologies can analyze payment patterns, predict potential delays, and recommend actions to expedite payments. AI/ML can automate routine tasks, such as sending reminders and reconciling payments, allowing staff to focus on more complex cases.
• RPA: Robotic process automation can automate repetitive and time-consuming tasks, such as data entry, invoice generation, and sending out payment reminders. This reduces the scope for human error and significantly improves process efficiency.
• Predictive Analytics: By leveraging historical data, predictive analytics can forecast future customer payment behaviors, helping businesses identify potential risks and take proactive measures. This can significantly improve cash flow management and reduce the incidence of bad debts.

Impact of AI/ML on AR

• Automated Credit Risk Analysis: AI and machine learning algorithms will become increasingly sophisticated in analyzing a customer's creditworthiness by examining vast datasets, including their transaction history, market trends, and even social media activities. This will enable more accurate and real-time credit risk assessments.
• Personalized Payment Reminders: AI-driven systems will tailor communication strategies to individual customers based on their behavior and preferences, optimizing the chances of prompt payments. This personalization can significantly enhance customer relationships and reduce delinquencies.
• Intelligent Dispute Resolution: AI will streamline the dispute resolution process by identifying and categorizing disputes, suggesting optimal solutions based on past outcomes, and even automating resolutions in straightforward cases. This will drastically reduce the time and resources spent on dispute management.
• Dynamic Payment Terms: Machine learning algorithms will enable dynamic adjustment of payment terms for customers based on their risk profile and market conditions. This flexibility can improve customer satisfaction and loyalty while safeguarding the seller's cash flow.

Wrapping Up

Top companies leverage innovative strategies and cutting-edge technologies to effectively predict and manage payment delays. They gain insights into payment behaviors by utilizing data analytics, AI, and machine learning, allowing for accurate predictions and proactive measures. 

Integrating robust communication tools and automated processes further streamlines AR management, ensuring timely collections and minimizing delays.

Companies anticipating payment delays can safeguard their cash flow, maintain healthy customer relationships, and avoid potential financial challenges. This proactive approach transforms AR management from a reactive task into a strategic component of business operations, contributing to overall stability and growth.

This investment mitigates risks associated with payment delays and uncovers growth opportunities. Enhancing your AR processes through technology and strategic foresight can improve efficiency, customer satisfaction, and a more robust bottom line.

Invest in the tools and training needed to predict and prevent payment delays. 

Embrace technologies that enable you to be proactive rather than reactive. Doing so protects your business from the pitfalls of delayed payments and positions it for sustained success and expansion.