Dun & Bradstreet’s Insights, Summer 2011 edition, discusses the problem of cash-flow and its impact on business failures. Their research finds that a spike in business failures for 2010, matches a spike in days to pay. Average days to pay are over 50 days, with large businesses (500+staff) the worst culprits.
With instantaneous electronic banking and sophisticated IT financial software why do we have such challenges in payment terms? Isn’t credit a hangover from manual days which we find too difficult to unseat? If we look at the rationale for credit in days of manual systems it is easy to see why it came about. Imagine the effort involved in manually recording and processing: sales into a paper ledger; creating invoices; mailing statements; writing cheques; and processing payments. It was reasonable that these tasks were centralised and consequently executed over an extended time-frame. Hence, it was not unreasonable to think that signing cheques would occur once at the end of each month – and hence the concept of giving 30 days credit.
Fast-forward to the present day. All of these processes have been automated and can occur at the speed of the electronic key-stroke. There is no process-based or technology-based reason why goods and services could not be paid for at the time of purchase. Furthermore, we have the technology available today (assuming permission was given) to verify that the funds are available in the other person’s account before proceeding with the transaction.
Implemented holistically, business could be transacted in real-time and the concept of cash-flow as we know it could be a thing of the past.
This is a case of technology moving faster than cultural change. We have come to accept credit and the abuse of credit as an accepted and essential part of business. In reality, it is a manipulated and out-dated function to which people cling. Unfortunately to break the cycle requires everyone to reform at the same time. Maybe one day…