Imagine you’re a shopkeeper and a customer packs a bag with groceries, only to tell you they’ll be back to pay for them in two months’ time. Maybe. It’s a scenario faced by Britain’s small businesses every day. According to recent research, SMEs see more than 38 days pass on average before they receive the money they’re owed and are collectively waiting on more than £30 billion in late payments.
The average SME is out of pocket to the tune of £31,000 at any one time, with one in ten having £50,000 or more of unpaid invoices. In these straitened times, late payment is becoming increasingly common and a real threat, as companies of all sizes struggle to pay their bills and pass on the financial hardship to those further down the commercial chain. Small firms are particularly hard hit, as cashflow rapidly dries up and vital time that could be spent running the business goes on chasing bills and debtors. And, of course, the banks are increasingly loath to help businesses with bridging loans in the current climate.
This week, David Cameron said enough was enough. The Prime Minister announced that the Government would be launching a consultation to look into the issue of late payment and whether large companies should be fined for failing to pay their bills promptly. Small firms were also urged to exercise their right by law to charge interest on outstanding invoices and given pointers on where to complain if they’re affected.
“More needs to be done to build a business culture across all sectors of the economy that sees the fair, prompt and reliable payment of suppliers become a core corporate responsibility which is taken seriously at the most senior levels.”
The Coalition Government has tackled the thorny issue of late payment before, launching the Prompt Payment Code in December 2008, a voluntary scheme that invites large businesses to sign a pledge to abide by the terms set out in contracts and not change these retrospectively. Then there’s the EU Late Payment Directive that was implemented in 2010, stating business-to-business payments should be settled in no more than 60 days and the payment deadline for public sector bills should be 30 days.
But there’s been evidence that larger firms are still using their muscle to avoid paying smaller companies, despite having signed up to the payment code and paid lip service to the new European regulations. The Federation of Small Businesses (FSB) has said that some of its member firms have had to wait for as long as 120 days for payment from signatories to the code, double the limit laid out in the directive.
Ironically, research from the Forum of Private Business suggests that local government can be among the worst offenders when it comes to dragging their heels over paying small suppliers. The FPB findings showed that just 51 per cent of invoices submitted to local councils by smaller firms between 2011 and 2012 were paid within the payment deadline of ten days imposed by the Government on local authorities. The FSB also singled out local authorities as late payers, saying that more than 13 per cent of small firms named councils as debtors. Interestingly, the FSB found that Government agencies and quangos also accounted for almost seven per cent of incidents of late payment, despite a commitment by Whitehall departments to pay 80 per cent of undisputed invoices within five days.
But if the Government can’t even be trusted, what can you do to ensure you’re not left out of pocket? About half a million businesses have already downloaded the Managing Cashflow guides published by The Institute of Credit Management (ICM), which include advice on payment terms and invoicing, credit insurance, chasing payment, and what to do when your customer goes bust. Tips include:
- Always agree payment terms before delivering orders and be proactive about chasing payments early if money is not forthcoming. Sending a polite email or making a quick phone call may be all that it takes to get the money flowing.
- Introduce electronic invoicing if possible to allow for instant transfer of invoices, as well as immediate verification that the customer has received the payment request. Cheques can genuinely get lost in the post and electronic payments are often quicker and more efficient than paper processes.
- Do raise complaints over late payment and use available legislation, such as the Late Payment of Commercial Debts (Interest) Act, to pursue tardy creditors and charge them interest on funds owed.
The Association of Chartered Certified Accountants (ACCA) also offers practical advice to businesses about being paid promptly, with guidance including:
- Get the credit manager in your business to work closely with those responsible for sales to ensure that payment is given as much priority as winning new business. In the smallest firms, these functions may be fulfilled by the same person, but, even so, it’s important to be thorough in checking out the financial health of any entity with which you plan to do business, using credit checks and industry information. The better you know your customers’ payment habits the more likely you are to be able to offer them more favourable credit terms, possibly even increasing the business you do with them. And if you realise they operate a very complicated payment process that could result in late payment, at least you’re forewarned and can adapt your own systems where necessary.
- Develop a credit policy clearly stating when you’re prepared to offer credit and for how long and preferably write this down for clarity’s sake. The staff who handle credit management for you should also be properly trained.
It’s impossible to totally protect yourself from exposure to late payment, but you can at least spread your risk and have sensible measures in place to minimise potential damage. You don’t want to get to the point of turning away business for fear of not being paid or even seeing your enterprise go under altogether. Be vigilant and be persistent. Name and shame serial offenders. And, of course, make sure you pay your own suppliers on time, too.
Image courtesy of Naypong / FreeDigitalPhotos.net