Getting paid is a pain for the UK’s small businesses. It’s time for a change

Although being in business is about getting paid, it’s almost certainly not the reason most business owners got into business in the first place.

Invoicing, chasing late payments, reconciliations? That’s not what gets entrepreneurs out of bed in the morning. So it’s frustrating to see that this is exactly the kind of thing that too many SMBs in the UK are spending too much time (and money) doing.

Take the findings of the Xero Small Business Index, for example, late payments to small businesses in the UK were made 7.3 days late respectively in the quarter ending June 2024 - the longest time since September 2020.

This is not a small deal. These delays have a major impact on both businesses and the stress levels of the people running them. Those who received the majority (60-80%) of their payments late experienced 6% more ‘cash flow crunches’ (where cash outflows exceed inflows) compared with those who generally get paid on time.

The main problem is the way businesses invoice

The difficulty stems from the fact that small businesses that invoice customers in the United Kingdom tend to do one of two things. Neither of which is ideal.

The first approach is manually generating and emailing them invoices with their bank details on the bottom or instructions for paying by card. A buyer-initiated payment like this leaves businesses with little control or visibility over how and, critically, when they get paid.

The second is submitting a massive spreadsheet export to their bank to initiate a Direct Debit payment run. Although this offers a higher level of control, it’s far from perfect. Putting together that spreadsheet is a labour-intensive and nerve-wracking experience: a misplaced decimal point might mean a million-dollar mistake. It can also lead to unpredictable billing dates for customers, increasing the risk of funds being unavailable.

And both approaches offer poor or non-existent integration with billing and accounting systems, which adds up to even more admin.

Automation is the answer

To cut out this admin and inject some much-needed control, visibility and predictability into their payments, small businesses could instead use digital payment offerings to invoice, collect payments and reconcile their accounts in a single flow.

But every small business is different, and the payment pains we’ve been discussing will be felt to varying degrees and at different times. So how do you know if and where you need to make a change?

What is your current state of overdue debt?

Money that’s locked away in receivables impacts cash flow and cash flow forecasting. Worse, as Days Sales Outstanding (DSO) creep up, so too does your exposure to risk and bad debt. By automating your invoicing, payment collection, and related processes you can smooth out any frictions that delay the collection and clearing of funds.

What does your accounts receivable process look like?

By adopting solutions and processes that increase control, visibility and integration in Accounts Receivable, you can put a stop to the cascading inefficiencies that eat up your precious time, including waving goodbye to the end-of-month grind of reconciling payments.

Are payments enhancing or harming your customer experience?

Consumers are increasingly used to accessing products and services with just a tap or a swipe. So making it harder than it should be for customers to pay you is a killer for the customer experience, and increases the risk of churn.

What is your total cost of payments?

The cost of payments is more than the direct cost of accepting them, such as transaction fees (which can be as high as 4% for cards). There’s the cost of fraud, for example. There’s also the payment failure rate, which for two-thirds of B2B and B2C firms, the cost of recovery of failed payments is more than 11% of the average payment size.

Comprehensive advice, from idea to decision time

From our conversations with small business owners, it’s clear they have a good idea that something has to change with their payments.

If that sounds like you too, consider how automating your payments can prevent causing unnecessary stress, save you time on admin and give you more time doing what you do best — which is why you got into business in the first place.