The EU’s late-payment directive came into effect in March this year, requiring European businesses to pay invoices within 60 days unless there is express agreement otherwise, while entitling enterprises to claim interest and compensation for late payments. But although the collection of payments on time remains a crucial component of working capital management, UK businesses have actually relaxed their attitude towards late payments in recent months, according to research published by Lovetts last week. The debt-recovery law firm found that in the first six months of 2013, companies waited 28 days longer before issuing a Letter Before Action on outstanding payment compared with the same period in 2012. Consequently, companies are waiting four months on average before initiating action on overdue payments.
Ad van der Poel, head of payments and receivables, EMEA, global transaction services, at Bank of America Merrill Lynch, says that in the small and medium-sized enterprise (SME) market “there is an understanding that based on the economic situation, clients are not always able to pay money quickly and are therefore giving each other some slack when it comes to paying later.”
In the corporate market, however, optimizing receivables is a high priority for many companies. “Just in the last couple of months, we have had more conversations about this topic than we have in the last couple of years,” says van der Poel. He attributes this surge in interest to several factors. One is the arrival of the Single Euro Payments Area (Sepa) and the need for companies to manage their own direct-debit mandates, which has led companies to look at centralizing their receivables – in the past, centralization has tended to focus more on payables.
A second driver is the emergence of new payment instruments, such as mobile payments as well as solutions that allow the dematerialization of cheques. In addition, van der Poel argues that the euro crisis has made more companies focus on counterparty risk and on the importance of reducing days sales outstanding (DSO).
Companies looking to improve their DSO have a number of different options available to them. One approach is simply to chase overdue payments in a more efficient way. “We are certainly seeing some new techniques and approaches emerging,” says CJ Wimley, chief operating officer at SunGard AvantGard. According to Wimley, one of the most important developments is risk-based collections, whereby companies evaluate the risk of their outstanding invoices in order to target their collection departments’ efforts more effectively.
“We use statistical behavioural models to allow us to assign the probability of whether a particular invoice is high risk from a collections standpoint,” Wimley explains.
“We put the high-risk accounts at the top of the call queue using our GetPaid solution, which is really an automation and workflow solution, to ensure that the first calls made by the collection department are to the accounts that have the highest probability of going severely delinquent.”
According to Wimley, another recent trend is that companies using third-party collections services are trying to do so in a more effective way. “There seems to be a lot of interest in minimizing the amount of accounts which are passed on to collection agencies,” says Wimley. “When they do pass accounts to collections agencies, companies are then trying to integrate and automate the way in which this happens.
“For example, once a final collection effort has been made and the corresponding reaction time has passed, our customers want to send the account automatically to the third-party collection agency in order to get it to them as soon as possible, which improves the likelihood that the agency will collect the overdue payment.”