By Tim Lord - Director, Receivables Management Services

The longer a payment remains outstanding the higher the likelihood that it will never be paid.

Many would think it safe to assume that this fact alone would cause business owners and managers to ensure their debtor policies and accounts receivable processes are a core priority for the business. However D&B's latest trade payments analysis and Business Expectations Survey results show that this is not the case.

The latest trade payments figures reveal that businesses are continuing to pay their bills at more than three weeks above the standard 30 day term, with the average across all industries in the September quarter at 51.6 days. The Business Expectations Survey further highlights the lack of concern about this trend, with the majority of executives surveyed indicating that they are not actively trying to reduce the time it takes their debtors to pay accounts.

Cash flow issues can have significant negative impacts on business operations. In fact, it is estimated that 90 per cent of business failures are the result of cash flow and risk mitigation problems. Why then aren't businesses seeking to reduce payment terms to a more acceptable level?

The answer to this question may lie in the strong economic conditions that Australia has been experiencing for some time now.

In the current economic climate Australian businesses are prospering and this has led some executives to take their eye off the ball in their management of their debtor portfolios. Because conditions are good, a late payment here or there doesn't have a significant impact on operations. 

The problem with allowing collections processes to lapse is two-fold:

• the number of payments outstanding and the length of time they are overdue will continue to escalate until they reach a point where they have a negative impact on business cash flow
• the impact on cash flow will often be felt very suddenly due to unexpected events and the effort required to turn it around can be potentially insurmountable for some operations.

With the US sub-prime crisis being felt in the cost of credit and expectations of an interest rate rise in the coming months, now is the time for businesses to pull their debt management practices back into line.

Either of these factors could lead to an increase in bad debts, a further a blow out in debtor days and a resulting slow down in the cash cycle. These factors could also be the trigger that pushes a businesses financial situation into negative territory.

The payment problem is a self-perpetuating cycle. If a business does not receive payment for its services in a timely manner it may be forced to hold onto its bills for as long as possible as a means of managing its cash flow. The flow on effect from this is that more and more businesses are dragged into the cycle and accordingly is becomes increasingly difficult to break.

Businesses must act. Executives need to pay attention to debtor management and cash flow processes to ensure their business remains strong.