Are you paying vendors on time?
Unfortunately, the reality is different. In 2021, 47% of businesses reported deteriorating vendor payment practices. Late payments affected 50% of all B2B sales, with 8% of invoices written off as uncollectible.
In a global marketplace with growing supply chain instability and inflation, healthy vendor relationships are important. Understanding what matters most to your vendors is crucial to maintaining access to the products and services your business needs. Read on to learn how you can improve your vendor payment processes and get ahead of the curve.
Why it’s important to improve the vendor payment process
To illustrate the importance of improving vendor payment processes, we’ll use a fictional example of a construction company based in the US combined with real statistics from the industry.
I’m the CFO of BTB Tech. We’re a mechanical and engineering contracting company that provides design, installation, and maintenance services for building control, HVAC, and fire safety systems in commercial buildings.
Like most construction companies, we were hit hard by the pandemic and it has affected our ability to pay our suppliers.
In 2022, late payments for invoices and wages were projected to cost the US construction sector an estimated $208 billion, a 53% increase. Late or delayed payments made up 12% of construction costs, and over one-third of companies (37%) reported they had to halt or delay projects. Half of all subcontractors (49%) had to wait longer than 30 days for a payment, and half (51%) had to rely on credit to cover payments to their own suppliers.
This disruption is having a major impact on the sector. In the same survey, 90% of general contractors said they see value in timely, reliable vendor payments, and 71% of subcontractors are considering potential customers’ payment reputations before bidding on projects.
In our business, you’re only as good as your reputation. We enjoy excellent relationships with our subcontractors for one reason: we always pay on time.
Unfortunately, the disruption sweeping the construction industry has affected our business. While we haven’t gone to over 30 days paying any subcontractors, we’re definitely feeling the impact. Just last month, one of our biggest subcontractors met with our CEO to discuss their concerns with late payments.
After their meeting, our CEO asked me to look into our vendor payment processes and improve them so we always pay on time. I started by digging into why we’re falling behind on payments.
What’s causing late payments?
There are several factors causing late payments across every industry. Global economic and political instability are affecting supply chains and causing shortages, which drives up the costs of things like building materials and tools. Rising inflation has also impacted prices and our supply costs.
These factors have affected our business. For example, supply chain instability has made it more difficult for us to source components. Shipping delays mean we don’t always know when those components will arrive. The delays increase our risk in another way as well–often we face volatile international supplier pricing because of inflationary pressures and currency risk.
Closer to home, rising interest rates and a decline in demand continue to fuel fears of a recession in the US construction sector. Although we’ve been ok so far, fear of a recession has had a dampening effect on the construction market in general.
These external factors have affected our ability to pay suppliers, but to be honest, we’re to blame as well. We’ve traditionally relied on a manual accounts payable process to pay our vendors and we rarely had any problems paying on time.
However, as our business has grown, so has the volume of vendor invoices we receive. Our AP team (who now work at home 3 days a week) are getting overwhelmed with work. As a result, invoices are getting backlogged and we’re falling behind on payments.
Addressing this problem requires a multi-pronged approach. Our performance, and resilience to withstand economic instability, rests on the health of our supplier relationships. We need to improve the quality of those relationships.
We also need to streamline our P2P workflows and accounting system to ensure we process and pay invoices on time. And finally, we need to more closely monitor our performance to ensure we don’t end up in the same place again.
Here’s how we’re going to tackle the problem.
Strategies for improving vendor payments
The bottom line is we think of our vendors as an extension of our business. Our suppliers enable and share in our success. We’re taking several steps to strengthen our vendor relationships and build greater flexibility and resilience in our business.
Strategy 1: Assess vendor relationships and KPIs
We’re going to start by inspecting the key performance indicators (KPI) for our procurement and payments process and assessing the health of our vendor relationships. Among the measures we’re looking at are:
Days Payable Outstanding (DPO) – the average number of days we take to pay our accounts payable balance. If DPO is too high, it shows we’re paying suppliers late. If it’s too low, it means we may not be taking advantage of credit terms to ensure health cash flow.
Number of payment errors – payment errors can damage vendor relationships. By monitoring the number of payment errors each month we can pinpoint and address the causes of the errors.
Percentage of supplier discounts captured – early payment discounts are a significant cost savings for our business. Tracking the percentage of discounts we take advantage of helps us ensure we’re maximizing our savings by paying before the due date.
Average time to process an invoice – tracking the average time it takes our AP team to process and approve invoices from purchase order to payment helps us set benchmarks for process improvements and shorten supplier payment times.
Strategy 2: Commit to timely payments
According to a 2022 survey by the Association for Finance Professionals, 54% of businesses report speed of payment as their primary payment concern, followed by transaction cost (43%) and certainty of payment (42%).
This shouldn’t come as a surprise to anyone. Our suppliers face the same economic uncertainty and challenges as we do. If we’re late paying them, it can affect their ability to operate their business, as well as their willingness to continue working with us. It’s more important than ever to ensure we pay them on time.
The solution to this problem is simple: commit to paying within a certain timeframe, and ensure we pay on time. Not only is this the best way to build supplier confidence, it also sets a realistic and attainable goal for our AP team to improve process efficiency.
Strategy 3: Improve vendor communications
This one is on us. As our business grew it became harder for our AP team members to stay in close contact with our vendors. This created a communication gap that became clear when we fell behind in invoice payments. And yes, frustrated vendors would try to follow up with us on invoices but our team was often late replying.
Our team was also frustrated with challenges getting and updating payment terms and contact information from vendors. We missed a few vendor payments because we had the incorrect payment info and sent the payment to the wrong place.
To resolve these issues, we’re planning to replace our spreadsheets with a vendor portal solution to centralize and improve supplier communications.
Strategy 4: Move to a vendor payment system
In their 2022 Sales Survey, Gartner reported that 83% of B2B buyers and sellers preferred ordering and paying through digital commerce. Again, this comes as no surprise–electronic payments are faster, cheaper, and more secure than paper checks and manual payment processes.
As part of our strategy to improve vendor payments, we’re going to move to an automated accounts payable and payments management system. By reducing the time to process invoices and pay vendors, automation will help us meet our commitment to consistently paying vendors on time.
Strategy 5: Measure and improve performance
Although this is the last step, improving vendor payments is a continuous process. After implementing these changes, we’re going to monitor our accounts payable KPIs like DPO to ensure we’re staying on track. Regular monitoring helps us identify and address inefficiencies and problems before they become serious.
By implementing these five strategies, I can get control of my vendor payment process and get my vendors paid on time. The key is to improve our workflows and then choose the right accounts payable automation solution to optimize our entire purchase-to-pay cycle.
We’re choosing Stampli as our AP automation partner. Stampli lets me monitor our KPIs in real time, improve our invoice processing time, manage vendor information, and switch to a unified vendor payment solution.
Improve vendor payment performance with Stampli
Stampli’s industry-leading AP solution uses machine learning and AI to automate invoice management, streamline vendor payment processes, and bring efficiency by automating previously manual processes. AP automation lets us move invoices through the AP process more efficiently.
Stampli also helps us control human error and fraud by providing real-time data visibility through visual dashboards. As a result, we can continuously monitor and improve our invoice processing efficiency.
We’re combining Stampli’s AP automation solution with three other solutions:
- Stampli Direct Pay to automate vendor payment management
- Stampli Card to manage corporate cards and AP automation from one solution
- Advanced Vendor Management to automate vendor onboarding and communications
With Direct Pay and Stampli Card, we can fully control our vendor relationships, centralize our payment methods, and speed up our vendor payments. Here’s what we like about it:
Payment agnostic: We’re free to choose our own payment types or providers without being tied to one provider.
Streamlined approval process: Our approvers can easily see payment information and docs for a simple payment approval process.
Easy and accurate ACH reconciliation: Direct Pay lets us process ACH payments with individual reconciliations in our bank statement. No more manual bank account reconciliations.
Stampli Card is designed for AP spend — giving you a single system with complete visibility, control, and efficiency.
Powerful vendor portal: Stampli Advanced Vendor Management lets vendors easily provide documentation and payment information, choose their payment method, and check payment status.