Small businesses, perhaps more so than their larger counterparts, are heavily reliant on maintaining a healthy cash flow in order to stay afloat. One major hindrance to cash flow is late payments – or, worse still, no payment.
In an alarming study, The Association of Independent Professionals and the Self-Employed (IPSE) recently revealed that 43% of self-employed workers have never been paid for work that they have undertaken and invoiced for. Late payment itself is the cause of 21% of insolvencies.
That might explain why one of Informi’s most read articles is: how do I deal with customers who do not pay.
This year, the issue of late payment was brought sharply into focus following the collapse of Carillion. The construction contractor was found to set 120-day payment terms with many of its suppliers – despite Carillion being a signatory of the voluntary Prompt Payment Code, which requires (but does not enforce) 60-day payment terms.
Carillion is by no means the sole example. In a naming and shaming exercise, the Government recently revealed the worst offending big businesses when it comes to late payment. The winner of that unwanted honour was Grainger & Worrall, an engineering firm, who were late paying suppliers 96% of the time.
Unsurprisingly, stories like this have prompted business groups and politicians to call for more to be done.
Speaking to a Commons Select Committee in March, Business Secretary, Greg Clark, urged action to combat late payment, particularly by larger organisations, admitting 120-day terms like Carillion’s were ‘too long’.
Conservative MP Paul Uppal spoke to the Financial Times citing FSB claims that 50,000 businesses shut down each year due to late payment. “I don’t think [120 days] is acceptable. Payment is getting later and it is becoming more widespread.”
So, what should be done?
In October 2018, a public call for evidence on creating a responsible business culture was launched by the Department for Business, Energy & Industrial Strategy (BEIS).
The Association of Accounting Technicians (AAT) supported by Informi, responded to the call for evidence by highlighting that the past decade or so has seen a stream of tweaks, voluntarism and reliance on big employers to do the right thing, all of which have failed to address the problem of late payments.
Informi agrees that the time has come for the Government to legislate to solve the problem once and for all, and is backing AAT’s three key recommendations to solve the problem.
- that the Prompt Payment Code should be made compulsory for companies with more than 250 staff
- that payment terms should be halved from a maximum of 60 days to a maximum of 30 days
- that a clear, simple financial penalty regime for persistent late payment should be introduced and enforced by the Small Business Commissioner
What are small businesses saying?
It’s not just Informi who are backing these calls, politicians from all political parties have done so and most importantly they already have the support of the SME community.
“I’m only a very small business and getting paid late means struggling with the mortgage and other household bills. The Prompt Payment Code is a good idea but it’s been around for years and hasn’t led to much of a change – it’s only signed by responsible businesses or those who realise it’s never enforced, so it’s basically meaningless. These recommendations for a statutory code for all companies employing 250 staff or more would be the best way of addressing this. It would mean all companies, large and small, would know exactly what their legal obligations are and SMEs could have much more confidence they are going to get paid on time.”
Tony Richardson of Richardson Consulting, a business advisory SME based in Plymouth
“My business partner and I have sometimes had difficulties getting money owed which probably wouldn’t have happened if there was a legal requirement to pay within 30 days and the realistic threat of a meaningful fine if it wasn’t paid. That’s why I support the these recommendations for change and really hope the Government is listening.”
Leanne McConnell of Virtually Perfect, an Eastbourne based accountancy SME
“As a start-up company, late payment caused me several difficulties but even now, as a firmly established and successful company, late payment can have a big impact on me and my company. These recommendations to halve maximum payment terms from 60 to 30 days and to require all companies with 250+ employees to sign the Prompt Payment Code are definitely steps in the right direction. Enforcement is also key because although imposing obligations is great if companies meet these obligations, there needs to be strong enforcement action against those that don’t – an initial warning followed by a fine for non-compliance would seem like a sensible option.”
Kate Bell, founder and Director of Zip Us In, an SME based in Salisbury.