Cash flow has been key for businesses of all sizes this year as spikes and sudden drops in sales and revenue has hit every sector. Making and receiving payments on time is a core part of a healthy cash flow and helps finance teams to paint a clear picture of the business’s incomings and outgoings.
Yet when this relates to big business – payments aren’t always made for the date the invoice is stamped with. This could be put down to a number of factors, like disputes over the goods or services received or the workload of finance teams meaning they fall behind on actioning payments. But sometimes, it could be because there’s no short-term tangible consequence for a business that chooses to pay late.
When it comes to larger businesses, incoming late payments might not have the same impact or potential damage that a late payment can have on a small business, which relies more on a healthy cash-flow to function month-to-month. It may mean larger businesses are unaware of the impact late payments have on suppliers.
In a year where the UK’s economy has been hit hard, this has only heightened the importance of this issue. According to research from BDO, which provides insight into business finance, it found the average time it takes large businesses to pay suppliers has extended by a further two days to 35 in Q3 of this year. While the proportion of invoices not paid within the agreed terms rose to 29 per cent, up from 26 per cent for the same period last year.
The sector you work in also has an impact on whether you’re paid late and how late those payments are made. Research by the bank Tide, has found that construction businesses on average experience late payments most, with 22 per cent of invoices paid late, while IT and manufacturing were also around the 20 per cent mark. On the other hand, retail businesses find that almost nine times out of ten of their invoices are paid on time.
According to the Federation of Small Businesses (FSB), 50,000 small firms go out of business every year in the UK due to late-paying clients, showing just how important it is as an honest business practice for all businesses to keep up with payments to their suppliers and partners whenever they can.
Penalties for late payments
This might be about to extend further than just a moral standpoint for businesses to support one another – something which we have seen many great examples of this year as companies supported partners in their supply chain or customers who use their products in reaction to the pandemic. So we know there is a will among UK businesses to have one another’s back when times are tough.
It was announced right at the end of September that the Small Business Commissioner may be able to issue fines to companies who pay their suppliers late. This proposal is currently in the consultation stage and businesses have until 24 December this year to make their thoughts heard on it.
The plan is part of wider consultation to extend the Small Business Commissioner’s powers. If this legislation is passed, it will mean that businesses, especially medium to large ones, will be made to pay suppliers as a lump sum or as part of a payment plan, and if this isn’t stuck to – businesses could face penalties.
The issue of late payments has always been a key topic in the world of finance, and it has only been exacerbated by the Covid-19 pandemic as shown by the BDO’s research into payments. This is backed by the government too. According to the Small Business Minister, Paul Scully, £23,4bn is owed to SMEs in the UK – costing those businesses collectively £4.4bn a year to chase the money they are owed. A cycle of cost to the business they will want to get out of.
How can businesses ensure payment on time?
It gives businesses food for thought whether this legislation passes or not, but how can we ensure that we are paying our suppliers and partners on time unless there is a legitimate reason why we can’t? It’s not a straightforward one, especially as depending on what your business does and where it is based right now in the UK, it might be facing differing restrictions affecting its revenue and cash flow.
Taking a look at your finance teams accounting practices and support tools might be a good place to start to help ensure payments are kept up to date wherever they can be. Technology like machine learning and automation can mean that invoices are automatically given the green light and approved to be paid, reducing hold-ups..
This year has been really tough for UK businesses, but supporting one another is one way we can help to protect organisations and jobs. Making payments on time where we can, could make a massive difference to our partners and suppliers.
By Brendan Flattery, MD ERP at The Access Group