Managing Your Cash Flow
Better late than never? Unravelling the late payments culture
4 min read
04 May 2017
Small companies are the bedrock of the UK economy, accounting for over 99 per cent of private sector businesses last year, and employing nearly 16m people. But there is a problem holding most back – the late payments culture.
The scale of the issue is huge, with more than half of Britain’s SMEs currently waiting for overdue bills to be settled. This late payments culture can damage productivity and growth by holding back vital investments, and are symptomatic of a wider problem around regulating cash flow, which can contribute to business failure.
Here are five things worth knowing about late payments.
1) Why do we have a late payments culture?
There is a cash flow benefit to large businesses in delaying payments. However, for many large organisations that pay late or insist on 60-day terms, it’s not about wanting to be slow – big businesses have complex systems to navigate.
It is also a difficult cycle to break as companies are involved in two ways – both as supplier and client. A firm that is regularly paid late can end up being a late payer as a result. This may even itself out between large corporates, but can cause real problems for small business bosses who find themselves at the sharp end.
2) Are any changes in law needed?
The issue hinges more on how the government can help with the late payments culture, and could benefit from focusing on promoting best practice examples. Adopting a punitive regime would be difficult and unlikely right now, as it would require adequate resource and investment to monitor the problem and take action. Also, many small firms could find it difficult to lodge complaints against slow-paying large customers for fear of losing business.
3) How can we encourage the business sector and government to stop late payments?
One solution would be to implement an accreditation similar to the International Organisation for Standardisation (ISO) quality measures, pressuring bosses to prove they are paying small businesses on time. Part of the measure could be driven via feedback given anonymously from small companies. Internal compliance departments might then focus on ensuring prompt payments.
4) Why are small businesses susceptible to late payments, and why does it have such a detrimental effect?
Being paid on time is critical for small businesses, especially in the first few years and particularly when relying on a small number of large customers. Small firms do not have the same resources of large companies to fall back on when there’s a problem with payment.
Even where small business leaders have protective processes in place – signed official contacts, and clear payment schedules – they can find themselves in challenging circumstances. For example, late payment interest exists to support them, but many are cautious to use it for fear of harming existing relationships.
5) What steps can small businesses take in terms of protection?
Small businesses need an efficient payment management system to monitor payments, send reminder letters and have deadlines for escalating the process. Much of this can now be delivered via online tools, so does not necessarily mean hiring a financial controller if the business doesn’t yet need one.
Companies with good cash flow can minimise the need for financing via methods such as debt or invoice financing. This allows businesses to self-finance as much as possible and can open up the possibility of meeting growth ambitions without having to give up equity too early or too cheaply.
Bivek Sharma is head of KPMG Small Business Accounting