Ask any busy SME owner or finance director what are the main things that keep them awake at night and chances are they?ll cite late payment and managing cash flow.
Sadly, it’s a challenge that isn’t going away any time soon. The latest research from the Federation of Small Businesses (FSB) points towards some 84 per cent of small businesses having been paid late for a product or service.
Meanwhile, a third have received payment later than agreed on as many as one in four separate jobs. It all adds up to a heavy toll, causing the closure of as many as 50,000 businesses each year, at a cost to the UK economy of £2.5bn.
Although it’s a multi-faceted challenge that sadly can’t be solved overnight, thankfully there are still a number of avenues open to businesses looking to proactively tackle late payment, while Philip Hammond and his colleagues weigh up the regulatory options.
The simplest and most obvious starting point is to review your bookkeeping procedures. So often, late payment is exacerbated by invoices being addressed to the wrong person, sent in the wrong format or at the wrong time.
Large organisations can often have hundreds of suppliers on their books and thousands of invoices running through their systems at any one time, meaning those SMEs that don’t comply with the client’s preferred invoicing conventions often find themselves falling to the bottom of the pile.
A useful resource for advice on how to tackle the issue beyond administration checks and balances, is the government’s relatively new late payment complaints procedure.
Launched at the end of last year and centred around the website for the office of the small business commissioner, Paul Uppal, the resource comprises step-by-step guidance for small businesses on how to deal with late invoice payments, including how to escalate payment issues when they get out of hand.
It provides a three-pronged check, chase and choose process, designed to help small business owners actively challenge poor supply chain practice, and includes guidance on accessing legal advice, negotiating solutions and ultimately, submitting complaints to the commissioner.
Beyond process, the most forward-thinking SMEs are looking outside of the box at more innovative ways to get paid earlier than contracted terms. We hear from SMEs day in day out that cash is king and, without easy access to finance, they are actively looking for ways to increase their cash flow in order to meet their own running costs.
A growing number (particularly those providing goods and services for large public and private sector customers) are signing up to innovative early payment programmes, which give them the option to be paid earlier than their contracted terms in exchange for a pre-agreed, nominal fee against each invoice.
It adds up to a virtuous circle and mutually beneficial arrangement all round. Buyers benefit from technology driven improvements to their payment practices and procedures, enabling them to drive savings, improve operational effectiveness and deliver real social value down the supply chain, while SMEs get paid earlier, each and every time.
Apart from the obvious benefits in terms of improved cash flow, SMEs typically derive great comfort from the knowledge that all their invoices will be paid in a timely manner, which in turn provides far greater certainty to aid business planning.
It saves precious time and resources, removing the need to chase late payment. In addition, small and micro suppliers who tend to find it the most difficult to secure finance, can in some circumstances benefit from free early payment, through initiatives like our own FreePay.
Looking ahead, while the government’s tough talk on the issue is to be welcomed, experience tells us that fresh regulation won’t necessarily be the panacea that everyone seeks. Legislation has been in place for twenty years now, but it hasn’t had the necessary impact on behaviours.
In our experience, once an organisation recognises the benefits of a more strategic approach to their late payment practices they don’t need the threat of a penalty. It just makes good business sense all round.