There’s a kind of business failure that doesn’t look like failure until about a week before the end. The company is profitable. Customers like it. The order book is full. Then on a Thursday it can’t make payroll, because the money it earned in March is sitting in eleven other companies’ bank accounts.
That’s not a rare story. Australia’s small business ombudsman has been saying for years that late payment is one of the leading causes of small business insolvency here. Not bad products. Not bad management. The gap between doing the work and being paid for it. Singapore looks much the same: survey after survey finds more than half of SMEs are paid late, and a decent slice of those are paid more than a month late.
The businesses that go under this way are, by most measures, good businesses. That’s the part worth sitting with.
The number nobody watches
The metric that describes the gap is days sales outstanding. DSO. On average, how many days pass between issuing an invoice and the money arriving.
Invoice on thirty-day terms with a DSO of 31 and your customers are, roughly, paying on time. If your DSO is 58, and for a lot of trades, professional services and wholesale businesses it is, then you’re lending your customers a month of revenue, rolling, for free.
Most owners have never calculated it. Revenue is on the dashboard. Profit shows up eventually when the accountant sends the quarterlies. Cash in the bank gets watched anxiously and daily. DSO sits between those three numbers and quietly explains why they don’t agree with each other.
Here’s the arithmetic. A business turning over A$3 million a year on thirty-day terms should have about A$250,000 outstanding at any given moment. Let DSO drift to 60 and that becomes A$500,000. The extra quarter-million hasn’t vanished from the P&L. It’s still revenue and still profit. It just isn’t available to pay wages or the ATO. The business is a quarter of a million dollars poorer in every way that matters on a Thursday, and identically healthy on paper.
It drifts, it doesn’t break
DSO rarely blows out because of one catastrophic customer. It drifts, three or four days at a time, for reasons that all look minor in isolation.
The first reminder goes out late, because the person who sends reminders also does the bookkeeping and the payroll and answers the phone. When it does go, it apologises, because the customer is also a relationship and nobody wants to be the one who made it awkward. The second reminder is later still. The third usually doesn’t happen. By then the invoice has migrated into a spreadsheet called “to chase” that gets opened at month end and closed again shortly after.
On the other side, an accounts payable clerk is doing her job properly: paying the suppliers who ask, letting the quiet ones wait. That isn’t malice, it’s just what anybody sensible does with limited cash. From her desk, a supplier who hasn’t followed up in forty days is a supplier who doesn’t mind waiting.
And then the disputes. The invoice queried in a reply nobody read carefully. The delivery that was short by two units. The price that didn’t match the quote. Each one sits there unresolved, unpaid and unchased, because the query arrived as a response to a reminder and nobody’s actual job was to notice it.
What the disciplined ones do
Companies with a low, stable DSO usually don’t have more forgiving customers than you. They have a process, and the process is dull.
A courtesy note before the due date. A reminder on the day. A firmer one a week later. A phone call at a fortnight. A defined path for anything disputed. Every step polite, every step specific, invoice number and amount and date, and every step actually happening.
Bigger companies staff this. A credit controller in a mid-sized firm looks after several hundred accounts and spends the whole day doing what’s described above. The return on that salary is enormous, often ten to twenty days off DSO, which on a A$10 million business is hundreds of thousands of dollars pushed back onto the balance sheet.
Small businesses can’t make that hire. So they carry the DSO instead and pay for it in overdraft interest, in the hire they postponed, and occasionally in a very bad Thursday.
The uncomfortable bit
Late payment is mostly a consistency problem wearing the costume of a persuasion problem. Customers don’t need convincing to pay you. They need asking, clearly, on a schedule, and then asking again when they don’t.
The companies that die from this weren’t short of good customers. They were short of the capacity to keep asking.