Why does it take so long to get a bill paid?

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It’s fairly standard for it to take 30 days to get an invoice paid.  Often this means that internal systems are geared to a 30 day cycle and if something slips, the period can stretch out to nearly 60 days quite often.  In this day and age when payments can be made with a few mouseclicks it seems pretty stupid.

Of course it seems that the incentive to do this – at least with the payer – is that they can pocket the interest on the outstanding sum.  But firstly that’s small beer (see below).  And secondly it’s balanced by the other side’s loss of interest income – which raises the question of why they didn’t write something different into the contract in the first place – or perhaps they inflated their price so the purchasing business is actually not ahead.

To be economically efficient one would imagine that the delay would follow the firms’ relative costs of capital.  Smaller firms typically have a higher cost of capital so you’d expect small firms to pay late and large firms to pay early.  If anything the reverse seems to me to be the case.  What’s going on here?

Well if I were to guess I’d say that it’s one of those ‘systems’ things.  Systems take a long time to change because of network externalties.  Quite a few firms do require payment sooner than 30 days and charge penalties if you don’t cough up.  But of those that don’t I guess they put up with the system as normal and don’t haggle over small things when they want to keep their powder dry for large things.  And they console themselves with the thought that what goes around comes around – and of course this perpetuates the problem.

But what of governments?  Pollies are forever saying things (to themselves or to officials) like “I’m giving a speech to the Small Business Association on Friday – What can I announce that they’ll like?”  So why doesn’t government promise to pay businesses within 7 days?  Perhaps they have and someone can set me straight.  But they never pay Lateral Economics in 7 days – it often takes well over 30 days.  Meanwhile we always try to pay within 7 days.  You’ve got to pay the money anyway, so giving up 21 days interest at bank interest rates works out to less than half a cent in the dollar – much less than most businesses pay for credit card facilities.

With a cost of capital at under 6% per annum it would certainly be financially efficient and even cheaper for the Government to cough up quickly.  And it would be electorally popular.  To optimise the political cost/benefit equation one might confine the policy to small business. So Troppodillians, perhaps you know of some examples where this sort fo thing is happening and if so I’d be interested to know of them.  And if not, I’d be interested in your speculations, lofty or otherwise, as to why not.

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Francis X Holden
14 years ago

The larger the organisation the greater the disconnect between the payment side and the comissioning side.

I’ve never been paid in less than 30 days by a large mob and often waited 90 days. No one has any reward for paying. The work or progress has been delivered to deadlines, but those who are pleased with the deadlines are not those who administer the contract and those who administer the contract are not those who pay. What with “She’s away for 2 weeks” and “Oh it was his rostered day off and it missed this fortnight’s deadline” to “its out of my hands” – all from people payed electronically every fortnight whether they work are sick are slow or deliver anything.

Joshua Gans
14 years ago

My experience with the ACCC at the very least has been really good. Usually about a week.

Patrick
Patrick(@patrick)
14 years ago

Just on a side point:

But firstly that

Ck
Ck
14 years ago

I don

whyisitso
whyisitso
14 years ago

The problem with you economists is you know very little about business and acconting. It’s the cash flow, silly! Just about every small business (especially the fast growing ones) has some problems with cash flow and it drives their accounts payable supervisors batty. Most work on the decibel principle. In the old days when businesses used cheques the computer people used to print and envelope them and the accounts supervisor then placed them in his or her bottom drawer. They were taken out and mailed only when a supplier got insistent enough and nasty enough (ie about to withdraw credit), and the financial accountant made some funds available. Even then the relative dependency situation between particular supplier and payer was highly relevant. I guess today all that’s done electronically, but the principle remains the same, and human interventions still apply.

Most non-accountants have no idea of the difference between cash flow and profit. Often there is an inverse relationship between these two measures – the more profitable you become the greater stress on your cash flow. and don’t forget even your debtors have their own problems getting paid from their own customers. It’s a vicious circle.

In the case of governments (and I did work for a government agency once), one factor that used to apply was that if bill settlements could be habitually delayed, then at the end of the financial year a couple of months worth of expenditure could be saved from this year’s budget and put into next year’s. I’m not sure if this still applies or if today most government departments account for their expenses on an accrual basis instead of the old cash basis. Another factor is the sheer inertia that working for the government tends to engender in back office staff. That and their prevailing “the public be damned attitude”, as well as staff’s general reluctance to take personal responsibility.

Caz
Caz
14 years ago

whyisitso – governmnet departments have been required to report and manage accounts on an accrual for nearly ten years now.

When I wrote that they are required to pay on time, I meant that there are internal reporting consequences, and audit report consequences if they wantonly do not meet payment times. Ditto if paying early. They would have a lot of explaining to do on either count. The days of having a big bottom drawer are long gone.

Everyone pays and receives in 7 days?

Neither private nor public sector could do it, nor would they need to or want to. I’ve worked in both.

Ah yes, there really is a simple, obvious and wrong solution for everything.

Tony Healy
Tony Healy
14 years ago

Actually, Nicholas, I second whyisitso’s point that economists are often naive about business. For example, you write that you would expect “small firms to pay late and large firms to pay early” based on the different costs of capital.

But that overlooks the greater market power of large firms and, as someone above pointed out, the significant size of the money they owe to suppliers. Large firms systematically pay late to capture the interest on the money due, and also because they can.

Packer actually appointed people to his accounts department specifically to delay payments, and one of the big law firms used to boast about how clever they were to delay payment. Traditionally, law firms had seen it as professional to pay promptly, but the 90s breed of MBAs disabused them of that approach.

Most small businesses pay promptly because it’s simpler and shows respect to their suppliers. Government departments also usually pay promptly because their accountants take pride in honest transactions. The seven days you expect is too tight for their administration systems, unless special treatment applies.

If the Howard government was genuine about its independent contracting legislation, it would have introduced measures to give contractors more power to force timely payment. But as we know, the government does not really want to benefit contractors at all.

As a business person, you have to assess the type of company you’re dealing with. If delays arise from simple bureaucracy, you tolerate it. If they arise from accountants playing silly buggers, you suspend work and demand payment. Personally, I’ve even had occasion to go into a board meeting to demand prompt payment. That worked well.

I’ve heard of one law firm that used to chase delinquent payments by putting a partner and a secretary in a taxi for a day, visiting each of the clients. The secretary would rock up to accounts payable and request a cheque there and then, using the threat of the waiting partner to enlist compliance. Apparently it was effective.

Francis X Holden
14 years ago

whyis – Government depts – their main budget item / cashflow issue will be salaries 80% of budget, payable fortnightly and on time – entirely predictable. Next will be contracted basic suppliers, cleaning, ICT maintenennce, rent, car fleet, etc another 10% – 18%. Casual contractors like me would be less than 2% of total. Has nothing to do with cash flow.

Bring Back CL's blog
Bring Back CL's blog
14 years ago

the reason large companies ALWAYS pay very late and why Government departments always pay late is because they can. They understnd cash flow & liquidity very well indeed.
Small business cannot threaten because of the cost which is why I often recommend these customers get factored. Then they pay up on the dot.
The Government knows this. Every focus group of small business says the same thing.
We would love to be paid in 30 days but never are.
unfair dismissal laws were always way down the list