Small businesses collect more than half of their money late
Analysis Of Quickbooks And Xero data highlight the problem and opportunity for accountants and revops
It’s no surprise that small business managers tend to focus on growing sales to build their businesses. But it is a surprise that many managers don’t pay more attention to collecting payments on the sales that they made.
We see this every week as we talk to SMBs about their sales and collections performance. Managers often say they don’t have collections problems. However, after they connect Tally Street to QuickBooks, Xero or Sage Intacct, our reports highlight the size of the problem. Once this is recognized, managers appreciate how addressing this collection delay can help fund their growth.
Late payments are another pandemic for small business-to-business companies. We analyzed over $3 billion small business sales in the US and found that 57% of payments in 2020 were collected late. And not just a little bit late, 17% of payments were collected more than 30 days after the due date. For a $10 million business that means $5.7 million was collected late and $1.7 million collected very late — which could have been used to accelerate investments or hiring.
More than Covid lockdowns
You might attribute the large share of late payments to the very different year that many businesses had in 2020, but you’d be wrong! The performance in 2019 was actually worse, with 62% of small business payments being collected late.
That may seem counterintuitive at first, but when times are good (2019) many businesses loosen their credit policies and collection efforts. Then they tighten up when the market turns for the worse (2020) and there are more reasons to suspect that customers may not be able to pay what they owe. Times were good in 2019 with gross sales up 27% over 2018. Then gross sales fell 8% in 2020.
Painful hit to cash flow
Most SMBs are self-funded, making delays collecting accounts receivable especially painful to small businesses. That’s because SMBs really have just three ways to manage working capital: (1) accounts receivable, or money customers owe them, (2) accounts payable, or money they owe others, and (3) inventory.
The average company might have 40% of their working capital tied up in accounts receivable; in fact, professional service, software and other companies who are inventory-light might have 60% of their working capital tied up in A/R. This means that waiting an extra 30+ days to get paid can put a serious strain on the company’s ability to invest in other parts of their business.
What to do about it
There are a number of steps that SMBs can take to improve collections performance.
- Define credit policies and use them. That includes using consistent payment terms so that every customer knows when payments are expected. Good credit policies also include penalties for late payments, which need to be applied and can later be forgiven.
- Remind and follow-up with customers. Emails and documents get lost, people go on vacation, etc., and sending friendly payment reminders before and after the due date are often all it takes to significantly improve collections. Making it easy for customers to pay also helps.
- Measure performance and set goals. What gets measured gets done, and incentives help. A/R collections metrics such as DSO, ADD, DBT and the collections effectiveness index (CEI) track accounts receivable collection performance and are ideal ways to set goals and reward teams for hitting them.
Methodology
Tally Street analyzed over $3 billion in small business-to-business invoices across all industries and the payments on those invoices. The small businesses had annual revenues below $100 million. The dates payments were received were compared to the due dates from the invoices, and if the payment was late the number of days late was calculated for each payment. The total dollar amounts for each bucket of late payments were summed and expressed as a percent of the total payments received.