Managing Your Cash Flow

Tackling slow payments: Time to seize the opportunity

6 min read

20 March 2019

The proposals in the Spring Statement are an opportunity to turn up the volume on slow payments and finally put an end to them.

While it may have been somewhat overshadowed by the ongoing Brexit drama, last week’s Spring Statement nevertheless included some important new proposals to tackle the continued problem of slow payments for SME suppliers.

These included requiring large buyers to appoint a non-executive director with specific oversight of the company’s payment terms and requiring businesses to publish audited reports on their payment times.

The measures have been received very positively so far. The Federation of Small Businesses, which has been campaigning on this issue for many years, described them as potentially marking the end of the late payments crisis.

While more transparency and accountability for businesses is undoubtedly to be welcomed, the government will need to think carefully about what data they require to be published. Otherwise, the real extent of these problems, especially when it comes to the smallest suppliers, will remain hidden.

Slower than you’d think

When we consider the payment lifecycle there are three stages which we need to take into account. Although there is variation with different buyers’ particular terms, broadly speaking the process works as follows.

Firstly, there is the time it takes to receive the invoice, for example, the PDF invoice landing in the payment department’s inbox, and being input into the buyer’s accounts system. In many cases, the terms don’t start until this point. It is not uncommon for this period to be 10 to 20 days.

Step two is the payment term, which could be anywhere from 30 days to, in some extreme cases, 120 days plus. Usually, near the end of that payment term, the payment will be made, and the supplier will receive their money.

Frequently, however, an invoice will go overdue and be paid after that payment term. This is the third step: late payment.

This entire process involves significant stress, uncertainty and wasted time for the supplier which must constantly chase up their buyer to ensure that their invoice has been received, processed, approved and then ultimately to secure payment.

What really matters to suppliers is how long it takes to get paid in total. From sending the invoice to receiving the cash.

Unfortunately, the data businesses report under the current prompt payment code only asks buyers to report on part of that payments lifecycle: the length of payment terms and numbers of invoices overdue. The time it takes to input invoices into the payment system – which can be quite substantial – is unaccounted for.

This means that the payment situation is likely much worse than official figures indicate, particularly as they related to SMEs. It is crucial that the new enhanced reporting requirements give a full view of the length of payment times – not merely the invoices which go overdue. The reporting needs to show each how long each stage in the payment lifecycle is taking up so that we can ensure that firms can address problems at each stage.

Getting below the headlines

In order to gain a true picture of what is going on with payment terms, the new reporting will need to go below the headline figures and examine how the experience of being paid differs for different sizes of suppliers.

The current payment reporting data asks buyers to report payment times across all transactions with no distinction made between how smaller firms and big businesses are paid. Each invoice to each supplier is treated the same by the data, multi-national firms and small family business alike.

Yet, Previse’s own data analysis shows that, when it comes to payment times, size matters a great deal. Ironically, given that they are best placed to weather a more variable cash-flow situation, the largest suppliers are often paid first by buyers. The smallest suppliers, those which are least likely to have large reserves and will find it hardest to raise cost-effective short-term credit, have to wait for the longest to be paid. In fact, large buyers are paid two to five times as quickly as their smaller peers.

This is perhaps unsurprising. Larger suppliers are likely to have a stronger bargaining position as their contracts are often more valuable to the buyers. Therefore, they are in a better position to negotiate shorter terms and get paid promptly. However, they are also the suppliers which need the least help. No supplier should be paid late, but the smallest suppliers will find it the most devastating.

In order to make truly effective policy decisions around the issue of slow payment, we need to recognise that all suppliers are not treated alike and ensure that any proposed solutions are focused on helping the smallest suppliers.

The proposals in the Spring Statement are an opportunity to turn up the volume on slow payments and finally put an end to them. To seize this chance, however, it is vital companies are asked the right questions.

Paul Christensen is co-founder and CEO of Previse