Unpaid Invoices: Small Business Killer

Temitope Adeyemo

Cash is the blood of any enterprise. An enterprise that outflows cash more than it inflows will soon die. A bloated account receivable is entirely useless to a business if it cannot convert such to cash to run its day to day operations.

 Let me tell you a story of a good man, Mr. Akande. Mr. Akande left P.H.C.N to start a power vending company. The business idea was simple; provide a shared alternative power to residential estates and companies. Mr. Akande’s company (let’s call it Agba Power Ltd) charges its clients a premium rate above what the distribution companies charge. Whenever there is a power cut, Agba Power generators come up. So clients, are not just assured of constant electricity supply, they get it a cheaper rate compared to if they have to use their generators individually. Business was good. Contracts started flowing in. In less than a year, Agba Power signed power vending contracts with three reputable companies in Lagos. The contract terms were simple; vend power for us, present your invoices at the end of every month, and we will pay you 45 days after. To Agba Power, the terms were good. All that was needed now is a bank that will discount these invoices. Invoicing discounting is the practice of using a company’s unpaid accounts receivable as a collateral for a loan. His bankers, after considering the terms and the big firm being a highly reputable organisation, agreed to discounting the invoices. 

Joseph, an industrious young fellow started his company while he was in the university. He started a social research firm where he provides research for large companies who wants to know more about their customers. His target market is large conglomerates, international NGOs and government institutions. After years of struggling and putting structures in place, the business began to achieve stability. Contracts came in now and often, the company began its journey to growth and expansion. Two years ago, Joseph’s company (let’s call Page Research Company) got the biggest contract since the company started. They signed a 20 million Naira contract to conduct a research for a big FMCG company looking to expand into other West African Countries. The terms were similar to that of Agba Power’s; conduct the research, present your findings, present your invoice, we will pay your after 30 days. Akinwale approached his bank for an LPO financing (Local Purchasing Order).An LPO financing allows businesses that have obtained purchase orders or letter of contract award to deliver goods or services, using same order as collateral to borrow from a bank. The bank finances the contract and expects repayment once the contract issuer fulfills its obligation. Page Research’s bank, also considering the reputation of the company involved, availed a sum of 18 million naira to Page Research. 

Upon completion, as dictated by the contract agreements, Agba Power and Page Research presented their invoices to the respective companies. 30 days and 45 days passed, both Agba Power and Page Research did not receive payment as expected. 60 days passed, 90 days passed, all they kept hearing was “you will receive payment next week,” “The MD is out of town, you will receive payment upon his arrival.” 12 months passed, payments were still not made. Meanwhile, interests on loans kept accruing on both principal and interest. At this point, the amounts owed to the banks were now higher than the profit expected from the contracts done. Page Research eventually received payment 18 months after. After paying off the bank, The company ended up making a loss on the contract. Agba Power uptill date has not been paid. The company is indebted to its bank, its suppliers and its employees.

The business Killer

The stories above will resonate with a number of small business owners who are struggling to keep their businesses afloat. Unpaid invoices or delayed payments have become an existential threat bedeviling small businesses. The Vanguard in its report on late payments suggested that six out of ten invoices are not paid on their due date. Victor Osemota’s Deliver us from late payment mentioned a CEO who spent 70 percent of his time chasing unpaid invoices. 

Larger firms have a disdainful habit of delaying payments. This problem stems out of a number of factors;  one, quite a number of SMEs are chasing a few contracts. This creates an environment where SMEs are at the mercies of larger companies. Terms of contracts are usually dedicated by these firms and in a manner that favours just them. If one SME cannot do it, they can simply move onto the next one. Even when they owe you, there is absolutely nothing you can do about it. If you make too much noise, you may likely be ostracized by other firms as well. The problem with whistleblowing is that you can only blow it once. After that, everybody avoids you like a plague. Secondly, for accounting purposes, some of these large organisations find it most convenient to retain cash for as long as they can. Deloitte in its report- Strategies for optimizing your accounts payable noted that many businesses, as a core strategy, extend payables as long as possible to maximise free cash flow. Some CFOs go as far as placing  cash meant for paying vendors in some investment. 

Solutions?

Are there practical solutions small businesses can adopt to mitigate the implications of unpaid invoices/ delayed payments? Unfortunately, there is little they can do. Whatever solutions they come up with will still make them vulnerable.  Practical solutions lie with the willingness of the government to protect small businesses. The government should come up with measures that includes penalty, blacklisting, threat of bankruptcy to revocation of licences for large firms who purposefully leave invoices unpaid. There should be avenues for SMEs to report these firms without any fear of retribution or witch hunting. The government can also create an AMCON like agency or department that buys these invoices from small businesses at discounts. These will allow SMEs to spend less time chasing debtors. Alternatively, a policy that mandates all invoices to be registered with credit bureaus. If there is anything private sector dread most is being seen to flout regulations. It is bad PR. 

The government needs to do more to protect small businesses. Nothing kills business more than unpaid invoices. Small enterprise also need to find a way to manage this situation. Do not take on too much at once. Also, as much as possible, avoid taking bank loans for companies you know have a history of delaying payment. And finally, small enterprise owners need to create a support system where information are shared and properly managed. 

Temitope Adeyemo is the publisher @sme360ng and the author of Young, Black and Successful. Follow him on Twitter @topeadeyemo