How small suppliers are breaking the late payment cycle

Press reports that Business Secretary Vince Cable is considering the prospect of imposing financial penalties on businesses which pay their suppliers late seemingly proves that, unfortunately, the age-old scourge of late payment is alive and still kicking one-man bands.

In fact, collections specialist Hilton-Baird calculates that smaller businesses are paid an average of 21 days late by their larger counterparts, indicating that “late payment remains a thorn in the sides” of the tiniest businesses.

But our analysis of invoicing data reveals that some micro-businesses are actually breaking the cycle of late payment by exercising a significant degree control over when they get paid, writes David Evans, data scientist at accountancy software provider FreeAgent.  

A question of ‘recency’

By looking at the invoicing data, we found a group of invoices that weren’t just bucking the late-payment trend, but were, on average, getting paid within just five days.

Surprisingly, however, the common link between these invoices wasn’t their payment terms - as even invoices that were issued with 30-day terms (or more) were getting paid this quickly. Instead, the common link turned out to be recency, or how quickly the invoice was issued after the work was finished.

How long do you wait to invoice?

We discovered this recency link by first looking at the delay between finishing work and sending an invoice. Using an aggregated sample of invoices that used a timesheet feature, we compared the issue date of the invoice with the most recent associated time entry, then built up a view of the average number of days it took to send an invoice.

The results showed a variety of approaches - some people invoiced immediately, and we found that many people commonly sent invoices seven days after finishing the work. However, half of the invoices were sent around a month after the work was completed, and a surprising 16% sent an invoice over two months after their last timesheet entry.      

If you delay, your client will delay too

We then compared the recency of sending the invoice to the number of days it takes to get paid, and found a very strong connection: the shorter the delay in invoicing, the shorter the wait to get paid.

Invoices that were sent within a week of the work being finished were paid, on average, in fewer than five days. When the invoice was sent just a week later, the amount of time to payment doubled (to ten days on average). In terms of waiting to be paid, the cost of delaying becomes larger and larger as time goes on.

If you invoice quickly, invoicing terms don’t matter

Surprisingly, sending an invoice quickly even appears to override the terms that you’ve asked for payment - invoices that were sent up to 15 days after finishing the work were paid quickly, even if the payment terms were longer.

It is only after around two weeks that the terms on the invoice start to make a difference to the amount of time it takes to be paid. At that point, asking for 7-day terms instead of 30-days terms would decrease the average length of time to payment by more than seven days.

Drop everything and send that invoice

Based on these results, we can offer some simple suggestions to get you paid faster:

Invoice as quickly as you can after finishing the work, ideally within a week. And if you can’t invoice quickly, set shorter terms on your invoice

By invoicing quickly, you may be taking advantage of a recency bias in your client’s brain. This is where the brain tends to evaluate situations based on events that happened recently over those that happened in the past, so the client might assign more importance to your invoice because they just saw the results of the work. In other business contexts, The Recency Effect can influence how managers rate their staff or how investors decide which funds to buy.

Of course, it could also be that by invoicing quickly, you’re clearly demonstrating to the client that this money is important to you, and should be taken seriously by the client, too.

The author previously worked at CERN on the observation of the Higgs boson.

Editor’s Note: Further Reading – Contractor late payment letter- updated

Thursday 15th August 2013