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Exploring the necessity of prompt payments for companies

 

STUDENT PAPER

By Justine Renier

SKEMA Business School

Lille, France

 


 
ABSTRACT

Late payment remains one of the biggest issues for companies. In 2016, a research shows that 60% of businesses must wait 60 days for being paid and nearly half (47%) say some invoices require 90 days to be honoured. This problem is source of exasperation and sometimes a real pain for companies. It is time for businesses to act and encourage prompt payment. Therefore, the objective of this paper is to examine the causes of delayed payment, appraise the effect of this issue and find alternatives to solve it. The Multi-Attribute Decision Making tool, composed of non-compensatory and compensatory method, was employed to compare the alternatives and define the ranking order of the most suitable solutions. The result is that Payment period terms, Interest charges, and debt recovery are essential to avoid delays in payment and in a lower level the use of early discount payment.

Keywords: prompt payment act, required payment date, recovery debt, interest charge, cash flow, discount

INTRODUCTION

Late payment constitutes a real scourge in the business world. It represents one of the causes of business failure especially for small businesses. Late payment is defined as a debt service that arrived after the date of the payment was due or after a grace period for the payment has passed. In the United-Kingdom, late payments of small-and-medium sized represented £44.6 billion in October 2017. The problem is that delayed payments lead to cash flow issues. In fact, trade body R3 discovered in 2016 that late payment for goods or services was a main reason in 23% of corporate insolvencies. Besides, it involves a lot of time and money for corporate to pursue those who don’t pay. According to Bacs Payment Schemes Limited, the total bill of small business in England for chasing represents £2.16 billion. Moreover, the most regrettable thing is that 74% of firms consider that late payment is a reality of corporate life to deal with and it will never change.

This issue is not only the case of England, it affects most of the world. Other members of the European Union and America have to cope with the problem of the on-time payment. Atradius insurance company made a survey in the United-States, Canada, Mexico and Brazil in 2015 and revealed that 20% of the value of their Business-to-Business awaiting payments is more than 90 days past deadline. What is more, the late payment disturbs more than the direct suppliers whose is affected by the lack of cash flow. Indeed, this issue spreads to the supply chain increasing the risk for the buyer and degrading the local and global economy. Conversely, rapid payments help to develop firm’s purchasing power and production. It allows the company to save money by avoiding costly chasings. It facilitates also the relationships between suppliers and customers. On the whole governments, laws and corporates have to combat the culture of late payment in order to obtain some business and economic benefits.

This is why the purpose of this paper is to:

  • Understand the root causes of late or delayed payment
  • Assess what the impact of this is, especially on small businesses
  • Identify solutions to this problem

More…

To read entire paper, click here

 

Editor’s note: Student papers are authored by graduate or undergraduate students based on coursework at accredited universities or training programs.  This paper was prepared as a deliverable for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director [email protected].

How to cite this paper: Renier, J. (2018). Exploring the necessity of prompt payments for companies, PM World Journal, Volume VII, Issue IX – September.  Available online at https://pmworldjournal.net/wp-content/uploads/2018/09/pmwj74-Sep2018-Renier-the-necessity-of-prompt-payments-student-paper.pdf

 



About the Author


Justine Renier

Lille, France

 

 

 

Justine Renier is a Master 2 student in SKEMA Business School pursuing the specialization “Project Program Management and Business Development. She studied in ESDHEM which is bachelor degree in economy and a preparation for Business School examination before integrating the Programme Grande Ecole in SKEMA. She had some professional experiences in the procurement, accountability and project management areas. She lives in France, and can be contacted at [email protected] or www.linkedin.com/in/justine-rénier.