However, Mike Cherry, the national chairman of the FSB (Federation of Small Business) was at least cautiously optimistic in his assessment of the
potential impact on curbing late payment.
His comments, while a little vanilla, reflect the forward looking perspective of the FSB.
“Today’s corporate governance reforms includes a positive package of measures to improve the situation. Steps such as obliging the board members of big businesses to report on how they are fostering relationships with suppliers, as well as a new Financial Reporting Council (FRC) principle for greater engagement with suppliers and others, will make a difference…..
“If today’s package of measures, together with the Duty To Report on payment practices and the imminent appointment of a Small Business Commissioner do not shift the dial on late payments, then this will need to be looked at.”
BUT, “The Dial” hasn’t really been changing much for quite a while. Granted these reforms are new and need time to bed in but can they honestly be considered such a big step forward from the Prompt Payment Code (PPC)?
The issue is that, as with the PPC, emphasis is being placed exclusively on larger organisations to get their house in order. These are companies with generally unlimited resources and very strong political lobbying ties.
The government is unlikely to want to rock the boat for these organisation because while some of them may pay pitifully low corporation tax, they do at least provide jobs from which the govt. can levy it’s personal income tax revenue.
Jobs also result in political vaccination headlines around areas like falling unemployment rates and rising consumer confidence and while Brexit is going on nobody wants bad news coming out of the corporate sector.
Small businesses need to do more to help themselves and our research shows that they are trying:
The more businesses that take action for themselves the louder the message will be that the small business / supplier community will no longer accept the situation as it stands.
At The Prompt Payment Directory we are not declaring war, in fact nothing could be further from it, we are simply saying that rating the payment behaviour (good or bad) of customers right the way across the UK business community is the best way to bring about the transparency that the government seeks but in a fair and balanced way.
It will only apply to businesses that match two or more out of three qualifying criteria, they are:
A quick look at a cross section of businesses that have been rated on The Prompt Payment Directory reveals many of them are not household names so we’d expect there’s a reasonable chance they would not be required to report via the govt’s initiative. This points to the fact that late payment isn’t simply an issue between small suppliers and large customers.
While we support the government’s initiative and agree that late payment often starts at the top of the supply chain, evidence shows that it’s far from limited to that narrow band of businesses.
As such the duty to report will expose only part of the issue, however to extend it to all businesses in the UK or even mid sized businesses would be to place a costly bureaucratic burden on British businesses, a significant proportion of which are prompt payers.
Information is split into three parts referred to in the guidance notes as ‘Narrative’, ‘Statistics’ and ‘Statements’, they cover the following:
Invoices that have been received within the reporting period but remain unpaid need not be included in the statement.
“Any invoices that are received but not paid in the reporting period should be recorded in the reporting period in which they are paid. For example, if an invoice was received in the middle of the reporting period and was not paid before the end of the reporting period, it would not be included in the figures for that report.”
This suggests that invoices which have terms of 30 days but are received 15 days prior to the end of the reporting period should rightly be excluded from the statement, however invoices with terms of 30 days which were received 45 days prior to the end of the reporting period can also be excluded from the statement.
That’s not so bad in light of the fact that businesses must also report on the percentage of invoices that are beyond terms and remain unpaid in the reporting period. But,
‘If an invoice was already overdue at the beginning of the reporting period, it should not be included.’
This suggests that if an invoice was received in H1, went overdue and remained unpaid at the end of the H1 reporting period it would be reported against as part of the percentage of invoices that were beyond terms but remain unpaid during the reporting period, BUT when it rolls over into the next reporting (H2) period it would fall off the radar.
In conjunction with the above mentioned rule stipulating that any invoice due within a reporting period but still unpaid should not be included in the calculation for the percentage of invoices that were paid beyond terms, this means that an overdue invoice can only be included (one way or another) in the reporting process once no matter how long it remains unpaid for. This presents a potential loophole, albeit a small one.
It is understandable that the duty to report should be fair to both the companies that must furnish the reports and the suppliers, however, the absence of context means that the data supplied shows what has happened but not why it has happened, and so the transparency becomes somewhat clouded.
The ‘why’ is what helps suppliers make decisions when entering into new contracts.
Businesses are are only required to report every six months. Understandably to push for greater frequency would add an extra burden; initially a quarterly reporting period was mooted but this was pushed back on for that reason.
However, a change in behaviour on the part of the customer will take longer to be reflected, this is bad for suppliers if the change is for the worse and bad for the business making the statement if the change is for the better.
As already mentioned above, there is no context around the data organisations are being asked to supply such as wether an invoice was disputed, or incorrectly submitted – eg. no PO.
That means larger organisation may be required to report in invoices that were quite legitimately paid late. It would be pretty hard for that kind of information to be supplied in the reporting process but it’s just that kind of contextual information that is most useful to any potential supplier.
In situations where the percentage of late paid invoices may be high, for any organisation to report and publish such data is a counter beneficial thing to be doing and it leads to the obvious question of how it will be audited.
The guidance does not explain this but it does stipulate that anybody who is concerned that a business might not have complied or may have made a false statement can either contact / challenge the business directly or contact the Department for Business, Energy and Industrial Strategy.
This suggests the hope is the auditing process will be crowdsourced by the supplier community.
The penalties for non-compliance are strong and include a criminal offence and a fine for the directors or nominated partner of an LLP.
The initiative is very welcome and perhaps most importantly it raises the expectation among suppliers that they should seek and be able to find information that can help them make informed decisions before they go into contract negotiations with new customers.
But, the absence of context will make it harder to reach those decisions and this is where The Prompt Payment Directory can make a difference. Additionally, The Prompt Payment Directory gives suppliers the right to reply by allowing them to rate customers on a sliding scale according to their propensity to pay as well as a variety of other contextual metrics.
Of course for suppliers that are already owed money other remedies will be needed. Smaller businesses with tighter budgets and that are owed sums of less then £10k (or even larger sums) can use Cashflow Rescue, a low cost legal solution to recovering debt. Businesses with deeper pockets can go to specialist solicitors such as Lovetts.
Most importantly, suppliers can increasingly expect to be able take action for themselves to limit the risk of late payment ever occurring in the first place and this is the lowest cost and least stressful solution of all.