With 17 companies removed or suspended from the Prompt Payment Code, the crackdown on late payers has begun.
It’s a positive move, and SMEs will welcome the stronger stance, but with more than 1000 businesses still failing to report on their payment performance, will it have the long-term impact needed?
As 20 years of late payment legislation is testament to, regulations and penalties are only part of the solution. The culture of late payment is deeply entrenched in big business and there is no silver bullet – changing working practices will need a multi-faceted approach.
There needs to be a fundamental change in thinking around what is acceptable payment practice. Prompt payment is paying on time which is contractual and not something the Government should need to coerce large organisations into complying with; instead the focus should be on showing businesses the value they would gain from paying suppliers early.
The way in which trading relationships operate is often counter-productive – holding onto cash reserves, despite earning minimal returns, while suppliers find it hard to secure finance and, when they do, it is very expensive. Both buyer and supplier lose out as SMEs pass on cost and increase prices and the supply chain becomes unstable as smaller businesses struggle to remain solvent.
Robust, well-designed early payment programmes balance the needs of suppliers and buyers – and when this is the case – they are a key part of the solution to late payment. From our work with local government, NHS and FTSE100 buyers, we believe an effective early payment approach is based on four key elements:
1. Support the bottom of the supply chain – businesses must differentiate between their larger, cash-rich suppliers and small and micro businesses which play a valuable role in so many supply chains and help to ensure the health of local economies. We have worked with our clients to develop Freepay – enabling our clients to pay smaller suppliers early for free.
2. Digital transformation – the reality is that accounting practices are often outdated with both large buyers and many SMEs still exchanging reams of paper. For a small business this situation adds further costs and, without a robust digital audit trail in place, an additional pressure on stretched resources with time spent chasing invoices and raising queries.
3. Commercial incentive – there must be a clear financial benefit for the buyer to want to get cash out of the door. Educating companies on the efficiency savings of adopting progressive payment practices and commercially incentivising the buyer to pay its suppliers in a manner that eradicates financing charges in the supply chain, thereby reducing the price charged, is an important part of achieving change. Many organisations don’t realise the value they can unlock from taking a more strategic approach to their accounts payable function.
4. Choice – suppliers should have the choice between prompt payment, which should be standard, or being paid early.
The current payment culture means both buyers and suppliers lose out, companies should be focused on offering early payment to their suppliers not prompt payment. The result of paying suppliers earlier is a secure supply chain for buyers as well as cost and efficiency savings, while suppliers benefit from improved cash flow and, with credit lines free for real investment, the opportunity to grow and develop their business.