Skip to main content

Are corporations’ poor accounts payable practices putting Britain’s SME community at risk?

(Image credit: Image source: Shutterstock/MaximP)

Small and medium sized businesses are an integral part of the UK economy, making up 47 per cent of all private sector turnover, but poor accounts payable practices by bigger businesses and the increase of late payments are putting this essential ecosystem at risk.

The UK economy would be boosted by as much as £2.5bn if small businesses were paid on time, according to the Federation of Small Businesses, while insolvency trade body R3 said that late payment is a major factor in one in five corporate insolvencies.

The rise of 90-day payment terms imposed by larger businesses in particular, has meant that smaller businesses – those with an annual turnover of less than £1m – now report having to wait an average of 72 days for an invoice to be paid.

In fact, it is thought that small businesses in the UK are owed as much as £44.6bn in late payments, according to research by insurance company Zurich.

In reaction to this, the Government has introduced new stricter reporting requirements for large companies, making it a criminal offence to report late or in a misleading way when it comes to payment practices.

The first of these new six monthly reports were due on November 30, for companies with a April 30 year end. After analysing the responses of the 201 companies which have reported to date, Invu has found that these businesses have on average:

  • Paid supplier invoices in 39 days, the lower quartile take an average of 55 days to pay
  • Paid 27 per cent of supplier invoices late, the lower quartile averaged 63 per cent late
  • Offered standard supplier terms of 27 days, the lower quartile offered 55 days
  • Offered longest standard terms of 73 days, the lower quartile offered 124 days

More staggering is the range on late payments, with the best performing companies reporting no late payments, while the worst payers reported that 95 per cent of supplier invoices were not paid on time.

Contractual terms can be more even arduous with the average being 77 days and the lower quartile offering 148 days.

And this is not just a problem of smaller businesses being forced to sit back and wait for payments to come in the door, with a recent survey finding that 23 per cent of SMEs in the UK have been put at risk of closure by late payments, while insolvency trade body R3 said that late payment is a major factor in one in five corporate insolvencies.

All of this is a problem within itself, but it is particularly problematic for those small businesses with poor, little, or no financial controls or monitoring processes, which can easily find themselves buried in paperwork and struggling to keep track of late payments.

For any business, the availability of cash is all about working capital management and a key element of this is getting customers to pay on time, or keeping track of unpaid invoices when they don’t.

All of this relies on back office processes that allow businesses to gain control of billing processes.

To give you an example of how late payments can lead to costs racking up for a smaller business, if a company turns over £1.2 million a year and sales are an even £100,000 per month, with 30-day payment terms, if everyone pays in 30 days a business needs to invest £100,000 in working capital.

However, if customers pay 15 days late – 45 days from invoice – the business needs another £50,000 of investment. That’s an extra 50 per cent investment in capital for a delay of just 15 days.

This becomes even more significant in circumstances when suppliers are asked to wait 90 days for payment – which is becoming increasingly common – as working capital investment rises to £300,000 during this time period.

This extra investment in working capital cannot help the business case for innovation in small business and must harm both the supply chain and the national economy.

Just looking at the current issue enveloping construction company Carillion, after the company went into liquidation at the start of the year.

Introducing automation

Since the news broke the company has been accused of using delaying tactics to withhold money to defer payments to suppliers, while also being accused of taking up to 120 days to pay subcontractors – despite signing up to the Government’s ‘prompt payment code’.

It is not hard to imagine being a small contractor in the situation that you are waiting for a major company like Carillion to pay, trying to keep track of those payments and then finding out it isn’t coming.

Businesses are putting themselves at serious risk if they combine poor billing practices with weak accounts payable processes. Customer payment terms do not start until the customer is invoiced, so a delay in invoicing will further increase working capital requirements. Where supplier invoice processing is poor there is often a lack of visibility of future supplier payment requirements.

The perfect storm of a significant supplier payment demand arriving, while a business is short of cash waiting for customer money to come in, can lead to a business being put into administration.

The consequences of being out of control and struggling to process supplier invoices before their due date are far more severe than just the disruption caused by the number of calls received from suppliers chasing payments. It is highly likely that accounts will be inaccurate, which can lead to poor decision making.

An efficient supplier invoice processing system which ensures that supplier invoices are processed in a timely manner are equally appropriate for larger and smaller businesses.

The solution for each may lay in introducing some automation into the accounts payable process. The benefits of automating processes include increased productivity, accuracy and consistency. A wide range of automated accounts payable software is available to help different sizes of business which can reap all these advantages. These start from simple solutions based on electronic document management which digitise the process, through to end to end solutions that automatically capture invoices and workflow them through to the ledgers.

Ensuring that accounts payable processes are working effectively is an essential element of ensuring the UK’s vital SME community continues to not only survive, but innovate and grow.

Larger businesses which insist on a culture of late payments, may want to consider what will happen if those smaller businesses one day don’t exist.

Ian Smith, Finance Director and GM at Invu (opens in new tab)
Image source: Shutterstock/MaximP

Ian Smith is CEO and Founder of Gospel Technology who provide data security blockchain solutions for enterprises in both the public and private sector. Ian was also Founder and CTO of Butterfly Software which sold to IBM in 2012.