In his Spring Statement (13th March 2019) the Chancellor Philip Hammond announced the first steps to tackle the destructive impact of the late payment culture on the UK’s freelancers/sole traders and SMEs. The Chancellor said that he will require company audit committees to review payment practices and report on them in their annual accounts.
The collapse of the construction company Carillion acted as a stark warning about the importance for the economy to make sure that SMEs are paid on time by larger companies. Carillion, which was one of the biggest suppliers to the Government, were in essence using their supply chain as a line of credit, where it estimated that £750 million was owed to a range of small businesses and freelancers.
Small companies have always found it hard to get paid on time from the larger businesses they engage with. However, it is promising that there is now enhanced awareness amongst policy makers of how systematic the issue of late payments is. This is best typified by a new reporting regime for larger companies which forces them to reveal the number of days it takes to pay suppliers.
That said, policy makers can’t be expected to solve the problem exclusively, and collaboration is required from SMEs and stakeholders who represent their interests. The Federation of Small Businesses (FSB) has been highlighting the importance of late payments for many years and is presently campaigning for specific policy interventions to solve the problem.
Technology can also offer a helping hand to solve the underlying issue. Aggregate data sets from cloud technology companies can reveal payment trend insights which can be used both to lobby government, as well providing SME trade bodies with a new data point to come up with their own policy suggestions.
Stakeholders should also play a role in communicating to SMEs technology related solutions which they can use to solve late payments themselves. One such suggestion is to educate them about the importance of credit scores, and how they can use them to manage their own debtors’ books and reduce the instances of late payments.
Late payments are most definitely on the Government’s agenda. In 2017 Paul Uppal was appointed as the first Small Business Commissioner. His remit is to promote responsible payment practices, alongside helping to mediate specific disputes between large and small companies.
Additionally, the “Reporting on Payment Practices and Performance Regulations” were introduced. This requires large companies to report twice a year on their payment practices and policies.
Whilst these efforts by the Government are encouraging, fewer than 3500 companies have had to report on their payment practices. In turn, the powers of the Small Business Commissioner are limited with no ability to issue fines, and it was reported in June 2018 that just two cases have been investigated to date.
In time it is possible that these measures may help solve the late payment epidemic. However, in the interim trade bodies representing the interests of SMEs are lobbying for policy makers to make interventions which go even further.
Mike Cherry, the FSB’s national chairman has taken direct action by writing to the chairs and CEOs of all FTSE 100 companies to challenge the late payment culture head on.
From their own independent research, the FSB (an organisation which exists to support the 4.8 million self-employed people in the UK) found that 84 per cent of small businesses have been paid late by big companies.
In order to hasten change Cherry is pushing for large companies to be forced to appoint a non-executive director, who would take responsibility for ensuring responsible supply chain practices, to take charge of payment best practice.
Upon the announcement in May 2018 Cherry said:
“We can only end the late payments crisis and poor payment practices when we see a fundamental cultural shift in the boardrooms of big business, with those at the very top showing a willingness to address the issue and be accountable for their payment practices.”
The FSB is also trying to persuade the Government to force their suppliers to pay their bills on time, in order to encourage more SMEs to bid for their contracts. This would help the Government reach their target of small businesses winning 33 per cent of central government spending by 2022. This is a timely issue, with recent figures revealing that this dropped from 24 per cent to 22.5 per cent over the last 12 months.
Technology can play a part, too
Technology is also starting to play a prominent role in helping to address late payments. Cloud accounting and invoicing platforms, such as Xero, Sage One, Quickbooks, and Solna are now used by hundreds of thousands of small businesses in the UK.
These platforms carry aggregate real time data on a large, and growing, subsection of the SME economy. This data can be used to reveal intelligence on payment trends across all company users, as well as being able to drill down on a sector specific basis.
Xero is already beginning to explore such use of its data, and recently introduced the Small Business Insights dashboard. This is updated monthly, and has an ambition to give policy and industry decision makers real time insights into the health of small businesses.
Information on payments is a central tenet, with the Xero Dashboard revealing that over half of invoices with 30day payment terms were paid late in 2017.
The other cloud accounting platforms have the capability to provide similar insights, and disseminating these late payments trends will put more pressure on policy makers as well as being able to provide rich data sets to support future SME policies.
The requirement for payment reporting only applies to companies which exceed two out of three of the following criteria: turnover of £36 million; balance sheet total of £18 million; 250 employees. Whilst this makes it possible to look up the credit worthiness of larger companies, the vast majority do not have to report.
However, SME owners can take action head-on by monitoring the credit scores of new and potential customers. A credit score is a numerical indicator of a company’s financial health and their ability to service debt. Historically, they have tended to be used by larger companies to monitor their supply chain but are now also becoming increasingly marketed to small business owners.
Keeping tabs on the credit score of customers allows businesses to respond to adverse changes in the circumstances of clients by chasing customers for payment or changing payment terms on future related contracts.
For example, invoicing platform, Solna, blends credit score monitoring with automated invoicing. This allows users to access payment insights from their customers through a combination of credit score data as well as intelligence from open rates of invoices.
The accessibility of credit scores creates an opportunity for both trade bodies and policy makers to raise awareness of their importance in reducing late payments and helping SMEs make informed choices about who to work with and what terms to offer.
There isn’t likely to be a silver bullet to solve late payments anytime soon but the collective efforts of policy makers, SME stakeholders and the smart use of technology can help move the needle on improving the fortunes of the millions of business owners who make a vital contribution to the economy.
Inna Kaushan, CEO and founder, Solna (opens in new tab)
Image Credit: Centtrip