The recent announcement by the government to improve corporate transparency has been met with a luke warm reception in the press.

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:

  • 22% have blacklisted late paying customers
  • 39% enforce a late penalty fee
  • a quarter (24%) have sought a County Court Judgement
  • and more than a third (35%) have either used a debt collection agency or law firm, or an alternative low cost cash flow recovery service.

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.

 

Payment sentiment improvements

Over the past six months user of The Prompt Payment Directory have seen sentiment improve

Users of the Prompt Payment Directory have seen payment sentiment rise over the past six months.

On The Prompt Payment Directory suppliers can, using a 5 star scale, rate the payment practices of companies they have done business with, we refer to this as the PPD Score.

The PPD Score is an amalgam of other rating scales that ask three fundamental questions:

  • Is the customer likely to pay on time?
  • What is the customer like to do business with?
  • Would the supplier like to continue working with the customer?

 

One of the main reasons why suppliers prefer not to speak out about poor payment practices is the fear of loosing a piece of business. This suggests that in many cases while a customer may be a late payer the supplier would still rather continue working with them in spite of the risks to their business – suppliers to large supermarkets are a classic point in case.

However, in many cases customers might not intentionally pay late, administrative burdens or errors at either end can cause hold ups. In these instances the supplier might just need to work with a willing customer to find a way around the problem, again not a relationship worth risking.

PPD Score data from the last six months reflects this notion, it broadly shows that as the ‘payment’ score goes up and down over time so to do the ‘relationship’ and future business’ scores.

However while the correlation between the ‘payment’ and ‘relationship’ scores is a very close match it’s not such a close match with the ‘payment’ and ‘future business’ scores. Meaning that while in some cases a payment score may be low and can affect the business relationship it doesn’t necessarily dent the desire to continue working with the customer.

 

Payment sentiment tracker

Over the last 6 months The Prompt Payment Directory has tracked an improvement in “payment sentiment” among its users.

 

Having said all that, when you look at the kinds of explanations given by customers to account for late payment they paint a familiar picture. Some simply don’t give an explanation but obviously where a customer says they can’t afford to pay, there is cause for concern.

 

Explanations given for late payment

Time and again the same explanations given by debtors to suppliers crop up when explaining late payment.

 

 

 

 

 

 

 

 

 

 

Disputes after a contract has been agreed seem unreasonable but disputes can occur for many different reasons and there will always be two sides to every dispute.

Non payment as a result of issues further up the supply chain should really be an issue that is dealt with in the contract beforehand.

Accounts being too busy is a little rich, it’s the job of the accounts department to pay bills.

Changes in payment terms should also be dealt with at the contract level i.e. ensure that no changes can occur during the contractual period.

“Invoice has been lost” does sound dodgy, but if a PO is required and not quoted on the invoice then even this excuse can be legitimate.

 

To read more about  these kinds of excuses and how to address them read the PPD guide here.

FULL PRESS RELEASE. TUESDAY, 23rd MAY 2017

Due to late payments SME business owners:-

  • suffer depression, anxiety, increased stress & other mental health issues (29%)
  • sacrifice their own salary (36%)
  • can’t pay the mortgage or rent, or forced to sell their home (21%)

 

Over a quarter (29%) of UK SME owners struggle with depression, anxiety, increased stress and other serious mental health related issues caused by the worry of late payments.

More than a third (34%) regularly lose sleep over poor cash flow caused by clients paying late and 7% even claim to have lost their hair because of the anxiety.

The research commissioned by The Prompt Payment Directory (PPD), a new payment behaviour rating website, comes amidst Labour’s plan to crackdown on late payments to SMEs and follows the enforcement on 6th April of the Government’s new ‘Duty to Report’ scheme that requires large companies to report on payment practices twice a year.

The survey polled 1,000 UK small to mid-sized company owners who all suffer from poor cashflow due to late or outstanding invoice payments. The research examines the personal, financial and business impact of late payments.

 

The human cost

According to the FSB the UK’s poor payment culture costs the UK economy £2.5 billion each year and has forced 50,000 small companies out of business. 30% of invoices are paid late and, as PPD’s research reveals, more than a third (36%) of business owners are sacrificing their own salary as a result.

A lack of income caused by poor cashflow into the business because of late payments, is affecting the life of SME business owners outside of work.

Nearly a quarter (21%) struggle to pay their mortgage or rent or have been forced to sell the family home.
17% have re-mortgaged their home and 7% have taken out a payday loan to raise capital. More than a quarter (26%) have been refused credit and nearly a quarter (24%) have had to sell assets such as shares, pension plans and even the car to make ends meet.

The consequence of these late payment pressures is also destroying people’s marriage, family and social lives.

Nearly a fifth of SME owners combined say that poor cash flow from late payments has put significant pressure on their marriage/relationship (12%) or caused it to fail (6%). 7% have put on hold plans to grow their family, get married or go on honeymoon, 13% have removed their children from private school or can no longer afford to pay for school trips, clubs or tuition, and 1% have even rehomed the family pet because of the cost.

Many (28%) have cut back on their social activity like going to the cinema, eating out or drinks with friends; cancelled their family holiday; and cut down on family parties and celebrations.

 

Sacrifices to staff

Late payments have also led to tough changes to the business, reveals PPD’s research.

More than a third (36%) have paid their staff late, stopped or delayed bonuses, while nearly 10% have ceased staff perks like company phones, cars or health insurance, and cancelled staff social events including the Christmas party. Nearly a third (29%) claim that staff morale, recruitment and retention has been affected.

 

The brink of bankruptcy

Despite countless sacrifices, 18% of SMEs are on the brink of bankruptcy or liquidation due to late payments. Nearly half (42%) have been forced to take out a business bank loan to cover the outstanding payment.

More than a quarter (29%) struggle to pay the business rates with 21% struggling to pay the office mortgage/rent, and 18% have been refused a company loan due to poor credit score. A lack of cash means nearly a fifth (17%) of businesses are in desperate need of refurbishment with 14% unable to afford to replace out-of-date or broken equipment and furniture.

 

Taking action

Small businesses are hitting back against late payers.

22% have blacklisted such customers and 39% enforce a late penalty fee. A quarter (24%) have sought a County Court Judgement and more than a third (35%) have either used a debt collection agency or law firm, or an alternative low cost cash flow recovery service.

Hugh Gage, Managing Director of The Prompt Payment Directory, comments, “The financial implications of late payments have been well reported over the years but our research delves deeper into the repercussions of poor cashflow to reveal how it affects and even destroys people’s health and lives.

“The Government’s Duty to Report is a welcome step in tackling late payments but it has its limitations,” continues Hugh.

“Only large companies are required to report and only twice a year, but late payment isn’t simply an issue between small suppliers and large customers. According to recent Labour party figures, a hundred and sixty thousand small firms were forced to pay their own suppliers late because of delayed payments. Our research echoes these findings, with 26% of SME owners claiming that late payments are either made by smaller suppliers or a mix of large and smaller organisations.”

“Also, the Duty to Report requires debtors to report on their own payment practices which is counter intuitive, plus an absence of context behind the reasons for the late payment makes it harder for small businesses to reach decisions before entering contractual relationships.”

“To end the UK’s poor payment culture, we need greater transparency throughout the entire supply chain and to encourage best practice which is why we’ve set up The Prompt Payment Directory, so all companies can be rated on their payment behaviour whether good or bad, and by those that are affected – their suppliers,” concludes Hugh.

Recently we’ve had a spate of ratings on The Prompt Payment Directory with explanations to the effect that the customer couldn’t afford to pay the invoice.

There could be various reasons why a customer might not have been able to afford the invoice but armed with this insight from The Prompt Payment Directory all potential suppliers should of course be very wary about doing business with a company in this position. However, that doesn’t mean a business relationship should be ruled out altogether.

For any supplier armed with this information about a company they are proposing to do business with we’d recommend asking for at least 50% of the payment in advance and if possible all of it. In some verticals it’s not unusual when doing business with a customer for the first time to make such a request.

Also, go through the usual channels to check the company credit rating, and if need be ask the potential customer directly whether they know of any foreseeable impediments that may prevent them from paying their invoices…. see what they come back with, if it’s nothing then they may be hiding something.

It would also be worth taking a look at the most recent set of accounts, a basic version of which will be available on the Companies House register.

The outcome of of these discussions and investigations should help shape the final contract.

The Prompt Payment Directory’s scoring system aggregates data across various criteria including business relationship and the desire to continue working with a customer. Just because customer’s pay late it doesn’t always mean they have been difficult or unpleasant to work with.

If an invoice can’t be paid it could be due to an unusual occurrence that caused a temporary cashflow problem beyond the customer’s control.

If you see a PPD star rating of between, say, two and four for a company on our directory, it’s worth checking the detail of the rating on the company details page.