Better late than never?

Required payment periods for small firms will be slashed in half from July. Has the pandemic finally changed UK procurement for the better? David Burrows reports.

The UK is the “late payment capital of the world” concluded a survey of small businesses in 11 countries in 2018. Three years on and the government has promised to “build a culture of prompt payment”, especially between big corporates and their small suppliers. But will it work?

A nudge towards prompt payment. In January, the government announced changes to the Prompt Payment Code – a voluntary initiative in which the 2,800 signatories promise to pay suppliers on time. It’s administered by the small business commissioner’s office. Companies can be struck off the code and won’t be reinstated until their payment practices have improved.

From July, required payment periods to small firms will be cut in half – from 60 to 30 days. Business owners, finance directors or CEOs will be required to take personal responsibility by signing the code. They will also need to acknowledge that suppliers can charge interest on late invoices under the code and that breaches will be investigated.

Under the code, 95% of invoices must be paid within the timeframe. This leads to stronger supply chains and suppliers that can invest and innovate – not to mention recover more quickly from the pandemic.

Debt déjà vu. This is an issue the government has been trying to tackle for some time. According to the Federation of Small Businesses (FSB), around 50,000 businesses close every year due to late payments. Thousands more struggle with cashflow, and are forced to block recruitment or sideline planned investment. In 2018, 18% of all invoices paid to small companies were late, with one in 10 becoming ‘bad debt’. UK firms are paid on average 18 days late, compared to nine in Europe.

There have been well-publicised issues in the grocery chain – most notably Tesco, which was the subject of a high-profile investigation by the Groceries Code Adjudicator in 2015/16. The supermarket was found to have “knowingly delayed paying money to suppliers in order to improve its own financial position”.

The investigation seems to have spooked firms into acting more responsibly. Surveys by the GCA show that late payment issues affected 13% of suppliers in 2019, down from 35% in 2014. “I don’t have evidence it’s a real problem anymore,” the GCA at the time Christine Tacon said last year.

The supermarket saints? The pandemic has arguably enhanced the grocery sector’s new-found reputation for prompt payment. Some supermarkets moved quickly to speed up payments rather than slow them down. Aldi recently announced an extension of its immediate payment terms for small suppliers. Morrisons, meanwhile, reported that its immediate payment times increased its year-end net debt by £60m.

Some experts have suggested the gestures are not quite as significant as the positive headlines suggest. However, Malcolm Harrison, group CEO at the Chartered Institute of Procurement and Supply (CIPS), was moved to suggest last April that the pandemic was changing procurement – and fast.

“There are some themes I have observed in recent weeks that will change the face of procurement for the good,” including prompt payments. “Will this time perhaps encourage more transparency and an open-book approach to the way we manage our suppliers going forward?” he wrote.

Woeful Wetherspoon. Some foodservice businesses have found themselves on the wrong side of the media – most notably JD Wetherspoon which, as Footprint revealed, told suppliers during the first lockdown in March 2020 that money owed wouldn’t be paid until pubs reopened (before it was forced into a u-turn). In June, the small business commissioner wrote of his “dismay” at businesses that were delaying payments on a blanket basis. “For the small business owner, not receiving a relatively small payment can be the difference between putting food on the table or not.”

Primary producers have undoubtedly been hit hard. As restaurants and cafés closed in March supply chains were, as professor of food policy at City University Tim Lang put it in an interview with Wicked Leeks, “thrown into limbo. It was draconian.” A year on and for many the future remains uncertain. Research published last month by CGA and Alixpartners showed 9,930 licensed premises closed for good in Britain in 2020. Net closures increased 175%.

A helping hand. Other corporates have done all they can to help those further down the supply chain, for example by helping redirect supplies into retail or extending credit. Sometimes their hands have been tied though. At a Footprint Responsible Business Recovery Forum in the summer some speakers explained how they wanted to help suppliers more, but couldn’t: as firms extended the credit they have with customers, insurers in some cases reduced insurance cover.

Late payments spread during the pandemic. According to the FSB’s ‘Late again’ report, published in June 2020 and including a survey of 4,000 firms, 62% of small businesses have been subject to late or frozen payments in the wake of the covid-19 outbreak. Almost a third of all small businesses have had payments frozen, with no clear expectation of when these payments might be made, if at all, during the current crisis.

The wholesale sector reported the largest increase in late payments (71%), against an average of 44%. Accommodation (21%) and food and beverage services (24%) had less severe spikes given that most transactions are in ‘real time’ between the business and the consumer.

What is happening in the B2B supply chain before that remains unclear. The FSB notes: “While these sectors may have seen relatively small increases in late payment, they are also the sectors most likely to have either ceased trading due to government restrictions, or seen cancellations.” Around 60% of those supplying to the public sector also reported frozen payments or an increase in late payments.

As one FSB member suggested: “There is one area that the government has missed that would greatly assist the cash flow of SME’s at no long-term cost to the economy. That is speedy payment of suppliers by all organisations. This is an area that has been an issue for many SME’s for years and now is the time that something needs to be done about it.”

Addicted to late. Is an overhaul of a voluntary code enough? That the administrators of the code will be able to launch investigations without being formally asked to by SMEs is also significant, notes CIPS’s Harrison in response to the latest changes. However, the ability to charge interest on late payments is “eye-catching” but “very few SMEs will enforce them knowing that to do so could spell the end of a contract with a late-paying but valuable customer”.

Late payments have been likened to “crack cocaine” for large businesses, with the UK’s top four supermarkets thought to owe suppliers £12bn at any one time. Most could also struggle to hit the new 30-day deadline: the major supermarket chains paid invoices on average within 42 days (three days longer than two years ago), according to data compiled last year, with just over one in four (26%) paid within a month.

Harrison believes that for too long some UK companies have seen late or delayed payments as a method for managing cashflow and improving financial performance. “Now more than ever we must treat SME suppliers making up over 99% of the business population in the UK as a source for new ideas and business opportunities and not a source of cheap finance,” he says.

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