How mid-sized companies can manage and reduce payment in arrears to maximise liquidity

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Payment in arrears is widely adopted by UK mid-sized companies as a mechanism to manage liquidity and supplier relationships. While this practice is designed to optimise working capital, a recent Intrum report shows 48% of UK companies experience liquidity pressures due to delayed payments. These issues are even more impactful for growing businesses operating complex supply chains.

This article explains exactly what payment in arrears means for growing companies, highlights the risks and benefits of this model, and contrasts it with advance payment strategies. You’ll also find actionable tips and digital best practices to help you leverage payment terms, strengthen supplier and client relationships, and keep your finances under control.

Definition: Payment in arrears

Payable in arrears meaning

Payment in arrears describes a situation where goods or services are paid for after they have been delivered or completed. This structure is used both for billing customers and for paying suppliers or employees, and is commonly agreed upon in business contracts.

Business context

In a business setting, payment in arrears is a deliberate practice—distinct from accidental late payment. It’s often established to improve cash flow or to ensure that payment accurately reflects the value or work delivered. You’ll see payment in arrears applied across areas such as payroll, supplier invoices, utilities, and recurring services.

Billing in arrears

Billing in arrears is simply issuing an invoice after the goods or services have been provided. This allows companies to align payment with real consumption or delivery.

Examples of payments made in arrears

Payment in arrears is a widespread and practical approach in business. Here are some common scenarios for mid-sized companies:

Monthly payment in arrears

Many companies pay salaries, rent, or recurring fees at the end of each month, once the service period has ended. This ensures accurate disbursement—factoring in overtime, adjustments, or bonuses—and aligns payments with real activity.

Salary arrears

Salary arrears occur when employees receive late payments or need retroactive payout adjustments. While sometimes necessary, recurring salary arrears risk damaging employee trust and increasing regulatory exposure. Proactive monitoring can prevent lasting issues.

Supplier contracts and accounts payable

Supplier contracts often use “Net 30” or similar terms, where payment is due a set period after delivery. This provides cash management flexibility but, if poorly managed, can erode supplier relationships and impact credit ratings

Payment in advance vs payment in arrears

Choosing between payment in arrears and payment in advance involves weighing differing impacts on cash flow and partner relationships. Here’s a direct comparison:

Payment in arrears vs. payment in advance (comparison table)

Payment in Arrears

Payment in Advance

Timing

After goods/services delivered

Before goods/services delivered

Accuracy

High (invoice matches actual usage/costs)

Lower (based on estimate/quote)

Refund/Adjustment

Fewer adjustments needed

Higher risk of refunds/adjustments

Cash Flow Impact

Flexible for buyer; may delay supplier payment

Immediate cash for supplier

Supplier Relations

Can build trust if well-managed

Can strain relationships if inflexible

Risk

Possible late/non-payment risk

Eliminates payment default risk

There are advantages and disadvantages to both payment in advance and arrears, let’s take a look at these in detail:

Benefits of payment in advance

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    Payment is made up front, so businesses don’t have to worry about what payments are outstanding

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    Supplier relationships are improved as this has an intangible, goodwill factor

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    Eliminates the risk of any late payment penalties

Drawbacks of payment in advance

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    Reduces buyer’s cash availability

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    Increases risk of overpayment or future adjustment needs

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    May complicate reconciliation if order changes occur

Benefits of payment in arrears

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    Greater payment accuracy: Payments made in arrears are based on actual goods delivered or services rendered, reducing the risk of overpayment or the need for subsequent refunds and adjustments. This streamlines account reconciliation and minimises administrative effort.

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    Enhanced flexibility and trust: Allowing customers to pay in arrears can improve liquidity management on their side, foster goodwill, and help build long-term relationships—especially with new clients who may be wary of advance payment requirements. Flexible terms can offer a competitive advantage when negotiating B2B contracts.

Drawbacks of payment in arrears

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    Delayed cash inflow: Funds are received only after goods or services are delivered, which can put pressure on working capital and limit liquidity available for daily operations.

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    Higher risk of non-payment: The absence of immediate payment increases the risk of missed or forgotten invoices—either due to customer oversight or inadequate internal follow-up—potentially leading to permanent losses or extended Days Sales Outstanding (DSO).

Without proactive reminders and a robust accounts receivable process, these risks can quickly escalate and negatively impact both cash flow and business relationships.

The impact of payment in arrears on cash flow and supplier relationships

Risks to cash flow and liquidity

While payment in arrears can be an effective tool for managing short-term cash flow, it also introduces greater volatility and uncertainty. Future payments are never fully guaranteed, complicating cash flow forecasting and making it harder to plan investments or meet financial obligations. Inconsistent cash inflows may also cause a business to miss out on strategic opportunities, such as taking advantage of supplier discounts or responding rapidly to market changes.

Implications for supplier relationships

Although paying in arrears may initially benefit a business’s liquidity, recurring delays or missed payments can erode trust and strain relationships with suppliers. Over time, this can result in less favourable credit terms, supply disruptions, or even loss of key partners—especially for companies with a limited supplier base. Maintaining clear, reliable payment practices is crucial for sustaining strong, resilient supply chain relationships.

Best practices for tracking, managing, and reducing payment in arrears

To reduce payment arrears and optimise cash flow, mid-sized companies need to improve visibility, automate their processes, and build trust with clients. Here are the key levers:

1. Improve visibility & centralisation

Centralise all your accounts receivable and payable data. Platforms like Agicap offer centralised dashboards and multi-entity tracking, providing real-time visibility over outstanding and overdue payments across your organisation.

2. Deploy a comprehensive cashflow management system

A robust cashflow solution—such as Agicap—enables automated invoice tracking, reduces errors, and improves forecasting accuracy. Key features include setting a “Promised Payment Date”, streamlined follow-ups, and allowing clients to settle invoices directly via an online portal, which accelerates collections and improves overall cash positioning.

"Agicap has been a game changer for Room America because of the timeliness of the information, the ease of access, and the granularity of that information to allow us to make excellent and strategic decisions over time." — Carey Grainger, CFO, Roof America

3. Negotiate partial payment in advance

Requesting a deposit or partial upfront payment helps reduce late payment risk and ensures commitment from both parties. This approach combines the flexibility of payment in arrears with greater certainty for your company’s cash flow.

4. Set clear payment terms upfront

Ensure all contracts clearly define payment timelines, late fee policies, and escalation steps in the event of non-payment. Alignment from the start helps avoid misunderstandings and costly disputes.

5. Automate payment reminders and workflows

Leverage automation to reduce manual intervention. Tools like Agicap automatically send invoice reminders, flag upcoming due dates, and even enable down payments directly from purchase orders—minimising the risk of forgotten invoices or missed follow-up.

6. Build strong client relationships

Consistent communication and transparency foster trust. Strong relationships encourage timely payment behaviour and can lead to more favourable terms over time.

Turning payment in arrears into a strategic advantage

Payment in arrears remains a common and valuable practice in today’s business landscape, offering both greater accuracy in payments and flexibility for clients—two key factors in building lasting business relationships. However, without the right controls, this model can expose companies to increased risk of late payments and cash flow disruption, potentially limiting growth and agility.

By applying the best practices outlined above—improving visibility, automating processes, and nurturing strong client relationships—mid-sized companies can leverage payment in arrears to their advantage while effectively mitigating its risks.

Ready to take control of your liquidity and drive sustainable growth? Book a free demo with Agicap and discover how you can streamline cash flow and optimise your payment processes.

FAQs

What does it mean to pay in arrears?

To pay in arrears means to settle an invoice after goods or services have been delivered. For many mid-sized companies, this is a common approach to managing working capital with suppliers or service providers.

What is an arrears payment?

An arrears payment is made after completion of the agreed period of work or service. This helps mid-market businesses ensure accuracy—such as paying for actual hours worked, or for services received during the previous billing cycle.

What is an example of payment in arrears?

A typical example for a growing company is payroll: employees are often paid at the end of the month for work completed throughout that month. Another example is paying vendors on “Net 30” or “Net 60” terms, after receipt of goods.

What is billing in arrears?

Billing in arrears refers to issuing an invoice to your customers after goods or services have been fully delivered. This allows mid-market businesses to align invoicing with actual delivery, improving cash flow visibility and accuracy.


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