10 min read
For businesses with recurring revenue models or those that collect payments over instalments rather than one-off payments, recurring revenue offers a greater level of predictability for income. These businesses can spend less time acquiring new customers and generally have a healthier cash flow as they can better forecast revenue.
As your business scales and grows, the more critical cash flow becomes, especially when considering making long-term and future-focused investments in your business.
Unfortunately, this model isn’t without its challenges. Problems faced when collecting payments on an ongoing basis, like revenue getting stuck in account receivables, can jeopardise the predictability of cash flow and ultimately impede business growth.
In this article, we look at some of the common challenges growing businesses face and how GoCardless can help you tackle them by optimising your payment process and improving your financial stability and cash flow.
Learn how GoCardless:
eliminates late and failed payments,
facilitates faster payment processing compared to traditional bank transfers,
offers proactive payment notifications that decrease the likelihood of failed payments,
reduces administrative tasks related to payment collections,
offers a unique system to retry failed payments.
1. Reducing Days Sales Outstanding (DSO)
Improving productivity and the efficiency of your payments by reducing credit risk and the risk of bad debt is essential to a healthy cash flow. At GoCardless, we have researched extensively to understand precisely how much of an issue problem or negative cash flow is.
As it turns out, for most businesses, the average number of days it takes to receive payment once it becomes receivable (aka the Days Sales Outstanding, DSO) is over 20 days, which seems dangerously high and unnecessarily risky for businesses.
But why is this so important for businesses to pay attention to cash flow and DSO?
When businesses have excess receivables or many outstanding payments, these uncollected funds can’t be used better, limiting investment in business growth, reducing resilience in a potential downturn and restricting a business's agility.
Specifically for those businesses seeking investment or fundraising, highlighting a stable cash flow is also an important consideration. As an essential measure of how a company is doing and even as an indicator of a business’s potential to grow or for resilience in a downturn, a healthy cash flow is an essential factor for investors.
So, what causes a high DSO, and how can it be avoided?
Many factors can contribute to a high DSO. As businesses grow, payment collection becomes more complex and convoluted. Manual and time-consuming processes like chasing failed payments or reconciling invoices and payments can become costly and inconvenient. A poor DSO is also often associated with push-based payment methods, like bank transfers and cheques, that rely on a customer to pay you. Meanwhile, pull-based payment methods like bank debit or automated payment retries can help to reduce DSO.
How can GoCardless help you reduce DSO?
Over the last ten years, Gocardless has built a dedicated solution for businesses collecting recurring payments. Whether you’re collecting invoices, membership fees, instalments or subscription payments, we put you in control of when payments are collected, making revenue more predictable. Automated bank payment, a pull-based payment method, gives you complete oversight of your accounts receivable and a better overview of your cash flow.
Businesses that use GoCardless see 97.3% of payments collected on the first try successfully. With real-time reporting, you instantly know when a payment fails so that you can take action immediately. Research from IDC identified that with GoCardless, businesses reduce the time to get paid by 47% and minimise debtor days by taking control of when payments are made.
How GoCardless helped Acumen
2. Recovering failed payments & preventing bad debt
In the pursuit of better business efficiency, payment success rates matter. According to a recent Accuity study, failed payments cost the global economy $118.5 Billion in 2020. By contrast, GoCardless's bank payment solution has been shown to provide higher success rates.
The power of GoCardless lies in its exceptional payment success rate. GoCardless boasts a payment success rate of 97.5%, which is significantly higher than card payment success rates. This higher success rate reduces payment-related stress and ensures a steady flow of income for businesses.
GoCardless offers merchants higher payment success rates by automating bank payment collection with pull payments such as Direct Debit. In contrast, accepting card payments can fail because cards can be lost, expired, stolen, and cancelled. Bank accounts cannot be lost, expired or stolen, so they do not suffer the same failure rates.
Payments can, of course, fail for other reasons, and failure rates do vary by payment method. Failed payments are also more likely to result in bad debt and customer churn. Nearly half of all respondents surveyed in a Forrester Consulting study commissioned by GoCardless found that 7% of all payments fail, and for two-thirds of B2B firms, 10% or more of their failed payments turn into bad debt. The costs associated with recovering these payments often equate to a significant proportion of the value of the payment. Forrester identified that for most businesses surveyed, the recovery cost is more than 11% of the average payment size. Taking these costs generated by failed payments into consideration, payment recovery can significantly impact a business’s cash flow.
Improving failed payment recovery rates and making the process more efficient is an excellent opportunity for businesses to improve cash flow. If businesses can reduce the number of failed payments, they reduce the risk of them becoming bad debt and lower the number of customers churning. Reducing churn and bad debt creates a more predictable revenue for businesses and positively impacts cash flow.
How can GoCardless help reduce failed payments?
While GoCardless already boasts a high payment success rate due to collecting payments via the UK’s bank payment network, we understand that specific issues, such as a lack of funds, can also cause payments to fail. To address this, GoCardless automatically retries failed payments, increasing the overall payment success rate and reducing your time to get paid.
To help businesses improve payment recovery, we created Success+, which uses recurring payment intelligence to predict and manage payment failures. Success+ automatically schedules payment retries on an optimal day for your customer.
Success+ creates a better customer experience and saves admin time for your collections team when manually chasing failed payments. Businesses that use Success+, on average, collect 76%* of payments that initially fail. Businesses are improving their cash flow by reducing the number of failed payments.
GoCardless lets your business control your payment process, eliminating late and failed payments and removing the need for manual client action to get you paid.
How GoCardless helped DocuSign
3. End late payments with automated bank payment collection
Late payments can pose serious challenges to UK SMEs, affecting their financial health, operations, and growth potential. Indeed Sage research shows that 40% of UK SMEs are consistently paid late, harming the whole economy. According to YouGov's 2023 survey, 67% of businesses reported that late payments hurt their cash flow.
Here are some key impacts:
1. Cash Flow Issues
The most immediate impact of late payments is on cash flow. SMEs often operate on thin margins and rely on timely payments to meet operational expenses like payroll, rent, utilities, and supplier bills. Late payments can disrupt this flow, making it challenging for SMEs to meet these ongoing obligations.
2. Growth Restriction
Late payments can stifle the growth of SMEs. Due to a lack of funds, they may have to delay expansion plans, new hires, or investment in new equipment or technology. This impact can be particularly severe if the SME operates in a highly competitive market or is in a crucial growth stage.
3. Increased Borrowing
To manage cash flow problems arising from late payments, SMEs may need to borrow, leading to extra interest payment costs also increasing financial risk. SMEs might also need help securing loans if they are deemed high-risk due to erratic cash flow.
4. Time and Resources
Chasing late payments can be time-consuming and divert resources from core business activities. It involves additional administrative work and can lead to higher costs if legal action or debt collection agencies become necessary.
5. Supplier Relationships
An SME must be able to pay its suppliers due to late payments to maintain business relationships. Suppliers may insist on advance payments, shorten payment terms, or even halt supplies, which can disrupt the SME's operations.
6. Employee Morale and Retention
If late payments lead to delayed wages, it can affect employee morale and lead to retention issues - particularly damaging for SMEs, where the impact of losing key staff members can be significant.
These issues underline the importance of robust credit control procedures and prompt payment practices in the B2B landscape. Tools such as automated invoicing, payment reminders, and online payment solutions can help SMEs manage their receivables more effectively and mitigate the impact of late payments.
How can GoCardless help reduce late payments?
With GoCardless, concerns over late payments and cash flow become a thing of the past.
GoCardless leverages the power of bank pull payments to automate payment collection, allowing payments to be automatically collected on due dates.
Now you no longer need to wait for the client to manually transfer the funds, thus considerably reducing the time to get paid. By automating the payment collection process and largely eliminating late and failed payments, GoCardless offers enhanced control over cash flow, reduces manual administrative work, and enables you to forecast future income accurately.
How GoCardless helped GrowFactor
4. Collection of one-off payments
Revenue predictability is one of the most significant advantages of a recurring payment business model. However, most recurring revenue businesses also need to collect one-off payments at various times, from charging for additional products or services and account top-ups to collecting one-off payments on new customer registrations or chasing a failed payment.
Collecting one-off payments can be challenging if your business is optimised for recurring payment collection. The current methods are limited:
Cards have expensive transaction fees
Bank transfers offer a poor customer experience
Bank debit is not optimised for one-off payments
How can GoCardless help collect one-off payments?
To tackle this problem, we built Instant Bank Pay. Powered by open banking and designed to complement your payment collection strategy. Instant Bank Pay, uses bank-to-bank payments, which are confirmed instantly, giving you and your customers visibility and creating a smoother customer experience.
By using Instant Bank Pay, businesses have the autonomy to collect recurring and one-off payments in the way best suited to their customers. By providing a better payment experience, businesses can reduce failure rates and improve the time to get paid and cash flow.
Businesses looking to take a first payment when a new customer signs up can take a one-off payment while simultaneously setting up a bank debit mandate. By collecting these payments successfully and quickly, with instant confirmation, businesses can maximise cash flow.
How GoCardless helped Gravity
Gravity Active Entertainment, an international trampoline and leisure park chain, uses GoCardless' Instant Bank Pay to collect payments reliably and cost-effectively. The move has seen a significant reduction in sign-up times and monthly savings of £3,600 compared to card fees. With Instant Bank Pay, Gravity can verify funds as soon as customers access their facilities, a method that has proven more reliable and secure than their previous system.
Enhancing customer experience: Instant Bank Pay has improved customer and employee experience. The system has reduced the sign-up time by about 40 seconds, allowing staff to interact more with members, thereby optimising the customer experience.
Improving the bottom line: Instant Bank Pay has protected revenue by reducing the number of customers failing to pay. Before the adoption of Instant Bank Pay, 33% of customers at Gravity’s Bluewater facility failed to pay. The savings on transaction fees have amounted to about £3600 a month, as bank payment fees are much lower.
Cost-effective collection: Most of Gravity’s subscription customers now pay via GoCardless bank payment which is much cheaper than collecting credit and debit card payments. Bank payments are more cost-effective because they are direct account-to-account transfers between two banks or even within an individual bank.
Card payments, by contrast, are routed through a network of intermediaries, each adding a small fee to the transaction cost.
Platform for growth: With almost five and a half thousand customers and a projected monthly growth of 6% over the next year, this payment collection method is a significant source of revenue for the business.
Find out more about how Instant Bank Pay can help you collect one-off payments.
GoCardless can significantly reduce the time it takes to get paid and Days Sales Outstanding (DSO), ensuring businesses have more control over their cash flow.
Direct Debit simplifies and accelerates the payment collection process with automated collection on your set dates. This system reduces administrative work and waiting periods, enabling businesses to forecast future income accurately.
The Success+ upgrade uses recurring payment intelligence to predict and manage payment failures, increasing overall payment success rates.
Instant Bank Pay offers swift confirmation and collection of one-off payments, improving the checkout experience for customers and reducing the risk of lost sales.
Frequently asked questions: Reduce time to get paid
How long does it take to get paid with GoCardless?
Getting paid with GoCardless typically takes around 3 - 5 working days. The process starts with submitting a payment request to GoCardless. The request is then submitted to the bank on the next working day. From the day the request is submitted to the bank, it generally takes another two working days for the funds to be debited from the customer's account and then a further two working days for the funds to be transferred and cleared into the business's account. Read more about Direct debit timings.
Additionally, new mandates result in longer wait times initially, taking between 5 - 6 days to receive the funds as the mandate has to be authorised and processed before payment is taken. Read more about Direct Debit mandates.
Finally, Instant Bank Pay offers you and your payers real-time payment confirmation. It can be used to collect on invoices, for one-off services, or combined with Direct Debit to take a first payment instantly when a new customer signs up before bank debit collections begin.
What are the benefits of using GoCardless?
GoCardless offers several benefits, particularly for businesses seeking an efficient and reliable way to handle recurring payments:
Automated Payments: GoCardless allows businesses to set up automatic payment collection, reducing the administrative burden associated with manual billing and improving cash flow consistency.
Reduced Payment Failures: With pull payments such as Direct Debit, your business controls the payment and sets the due dates, eliminating the chances of late or failed payments.
Lower Transaction Fees: Compared to other payment methods like credit cards, GoCardless offers lower transaction fees, making it a cost-effective choice for businesses, especially for recurring payments.
Global Payments: GoCardless supports international Direct Debit in various currencies, making it easier for businesses to collect customer payments worldwide.
Flexible Payment Options: GoCardless allows businesses to offer flexible payment plans to their customers, including one-off, recurring, and variable payment plans.
Integration with Business Software: GoCardless integrates with popular business software and platforms, including accounting software like Xero, QuickBooks and Sage, and subscription management platforms, making it easier to manage payments within existing workflows.
Security: GoCardless is regulated by the Financial Conduct Authority in the UK and uses advanced security measures to protect transactions, providing peace of mind for businesses and their customers.
By integrating GoCardless into their payment processes, businesses can enhance their efficiency, reduce costs, and improve their customer experience, all while ensuring the security of transactions.
What is Instant Bank Pay?
Instant Bank Pay is a payment method that allows for the near-instantaneous transfer of funds directly from a customer's bank account to a business's bank account. It typically bypasses the traditional card networks to facilitate quicker, more secure payments with reduced processing costs compared to card payments.
Instant Bank Pay leverages Open Banking APIs, a relatively new financial technology that allows third-party providers to build applications and services around financial institutions. Open Banking is designed to provide more seamless, secure, and customer-centric financial services.