Manufacturing businesses in the United States and around the world face one challenge that can disrupt their whole operation. This challenge involves collecting past due invoices. Unpaid invoices are a significant inconvenience to any business regardless of size. They are a common problem for manufacturers collecting debt that can cause significant financial burdens, creating a drag on cash flow and increased interest expense for capital needed to run business. The unpaid invoices impact just everything in the business operations. If cash flow is interrupted, the company will not have the money required to keep the business operational. This means they will not be able to pay suppliers, employees, or vendors on time. The business reputation will be damaged, and you will be slapped with late fees.
Around the world, 1 in 10 invoices is paid late, affecting small and medium businesses to the tune of $3 trillion. In the United States, over 30 percent of small and medium enterprises experience direct negative impact from late payments. A majority of businesses are now forced to wait at least a month beyond the agreed contract terms before being paid. Furthermore, many medium-sized companies in the United States experience the highest proportion of their invoices with overdue payments written off as bad debt. These late invoice payments create unnecessary financial stress for many medium-sized businesses and manufacturers.
Effects of unpaid invoices
Paying suppliers earlier is crucial for the health of a business, allowing manufacturers to cultivate a rapport with suppliers as well as take advantage of discounts. However, this is not possible when there are unpaid invoices and deficits in the invoices. The unpaid invoices impact a firm’s cash flow that prevents it from meeting operational expenses. This limited expense is more detrimental to medium-sized businesses and manufacturers with poor cash in store, as they will fail to run their operations smoothly.
When businesses fail to collect the past due accounts, they stand at risk of losing their business or jeopardizing their growth. Unpaid invoices impact everything and can lead to business collapse. With a lack of operating expenses, many firms will likely go down the drain. The impact of cash flow due to unpaid invoices will mean they cannot pay suppliers or run daily activities, forcing the business to close down.
The unpaid invoices damage the relationship between manufacturers and their suppliers because they cannot pay suppliers on time. Due to the limited cash flow from late payments, businesses will not have enough cash to pay their suppliers. This will impact commercial relationships since suppliers will only commit to companies that fulfill their contractual obligations. As such, the suppliers may decide to cut ties with the business and lose future working opportunities. In the long run, with unpaid invoices, your reputation with suppliers, and the rest of the stakeholders will be damaged.
At the same time, the unpaid invoices can affect the company’s credit ratings, which can be detrimental to the business in opening a credit account. The firm will fail to meet their creditor demand, causing lousy credit rating and any chance of obtaining future credit facilities. This can result in the business’ account being put on hold, preventing it from making any order for critical suppliers. In essence, the firm with an unpaid invoice will not have sufficient cash to pay off loans and affect the credit rating. As a result, the late payments prevent manufacturers from taking advantage of any prompt pay discounts on offer, impacting the profit margins.
When a manufacturer has multiple unpaid invoices, it will affect its plans in terms of financial growth and expansion. You won’t have a clear picture of your finances and where you want to be. As a result, the business will fail to take on new projects due to insufficient working capital. Unpaid invoices limit the cash flow of companies and thus hindering their growth. As a result, the firm will not be able to invest in new equipment, fill large orders, or take on new projects. Also, with more time spent on chasing unpaid invoices, a business will not have time to plan for better projects.
Dealing with unpaid invoices
Many firms faced with this problem of due invoice payments tend to spend a lot of their time and resources trying to collect the unpaid invoices. If they fail in their quest, the business will be in a worse position to recover from financial distress. The success of collecting unpaid invoices lies in having the necessary knowledge and experience to navigate the causes of these debts before they happen. Manufacturers also need to develop strategies to ensure the invoicing does not threaten their business health.
The issue of past due invoice payments has a significant impact on manufacturers and businesses with limited cash flow, resulting in companies facing numerous consequences, including the risk of shutting down. Medium-sized enterprises have been paying suppliers late due to the issue with unpaid invoices, with a majority facing additional costs due to late payments. In essence, this late payment culture has a ripple effect for the whole supply chain, with many manufacturers forced to make tough decisions to stay afloat. For example, some directors take pay cuts to keep money in the business or rely on their overdrafts to remain in business.
To avoid frustrations in running after unpaid invoices, the best thing is to put in place measures to avoid them. You can achieve this by researching all new clients’ history before getting into a contract to ensure they are not a credit risk. Also, sign a contract that allows you to ask for payment upfront. The last resort involves hiring a third party debt collection agency to do the work of getting your debt paid. In the long run, having a strong client relationship is the best way of avoiding unpaid invoices. Businesses must manage the collection processes and ensure on-time payments of the invoices.
When all else fails there are several strategies for recovering unpaid invoices that businesses follow. If a manufacturer has followed standard procedures for recovering a due invoice and 38 days have passed, they have the liability to use other drastic measures. One of the most successful methods entails using a third party debt collection agency as a last resort.
Third-party collections are often an option if an account has been written off as bad debt and deemed uncollectible by the original creditor. Using a third-party debt collection agency will allow you to focus on other tasks while the debt is being collected. This is also an efficient method of having the invoices paid since the agency has the expertise and efficiency of getting the task done. As such, there is an improved chance of debt recovery, even when that was deemed uncollectible.
However, when a third party is involved in collecting unpaid invoices, the business will only receive a percentage of the outstanding invoice. This is because your business will assign the debt collection to a third-party agency on a contingency-fee-basis.