In the UK, nearly 1 in 7 SMEs fail to pay wages on time due to cashflow problems (source: Intuit Quickbooks, 2019). Granting trade credit has advantages, but also creates an account receivable that weighs on your clients’ working capital – it is cash that is not collected on the date of invoicing, thereby creating a cashflow gap.
In the UK, the average DSO (Days of Sales Outstanding) sits at 51 days (source: Euler Hermes 2019), meaning companies usually must wait 51 days between the sale and the payment and expose their business to credit risks such as late payment or non-payment. Trade receivable may then become a bad debt, which is equivalent to a temporary or permanent loss of cash with respect to financial projections. Such bad debt is potentially very difficult to recover, especially if your client goes bankrupt. So, you should be geared up to deal with late payments and invest in efficient payment monitoring and recovery processes, if necessary, through a debt collection agency.
Internal debt collection involves significant costs in terms of human and technological resources, costs that an SME often can’t afford.