Tally Street Finds Small Businesses Collect More Than Half of Their Money Late

It’s no surprise that small business managers tend to focus on growing sales to build their businesses. But it is a surprise that many managers don’t pay more attention to collecting payments on the sales that they made.

We see this every week as we talk to SMBs about their sales and collections performance. Managers often say they don’t have collections problems. However, after they connect Tally Street to QuickBooks, Xero or Sage Intacct, our reports highlight the size of the problem. Once this is recognized, managers appreciate how addressing this collection delay can help fund their growth.

Late payments are another pandemic for small business-to-business companies. We analyzed over $3 billion small business sales in the US and found that 57% of payments in 2020 were collected late. And not just a little bit late, 17% of payments were collected more than 30 days after the due date. For a $10 million business that means $5.7 million was collected late and $1.7 million collected very late -- which could have been used to accelerate investments or hiring.

More Than Covid Lockdowns

You might attribute the large share of late payments to the very different year that many businesses had in 2020, but you’d be wrong! The performance in 2019 was actually worse, with 62% of small business payments being collected late.

That may seem counterintuitive at first, but when times are good (2019) many businesses loosen their credit policies and collection efforts. Then they tighten up when the market turns for the worse (2020) and they worry customers may not be able to pay what they owe.

Painful Hit to Cash Flow

Most SMBs are self-funded, making delays collecting accounts receivable especially painful. That’s because SMBs really have just three ways to manage working capital: (1) accounts receivable, or money customers owe them, (2) accounts payable, or money they owe others, and (3) inventory.

The average company might have 40% of their working capital tied up in accounts receivable; in fact, professional service, software and other companies who are inventory-light might have 60% of their working capital tied up in A/R. This means that waiting an extra 30+ days to get paid can put a serious strain on the company's ability to invest in other parts of their business.

What to Do About It

• Define credit policies and use them. That includes using consistent payment terms so that every customer knows when payments are expected.
• Remind and follow-up with customers. Send friendly payment reminders before and after the due date, and make it easier to pay.
• Measure performance and set goals. Track A/R collections metrics such as DSO, ADD, DBT and the collections effectiveness index (CEI).

About Tally Street

Tally Street helps businesses who want to grow and get paid by uncovering customer insights trapped in their sales data. Businesses know more about their most valuable and profitable customers and those presenting the most risk. Businesses grow sales and improve cash flow by better aligning finance and revenue operations with sales, marketing and customer success.

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