By Guy Corbet, Fourteen Forty
Late payment is the most common problem that SMEs face. But it doesn’t have to be. Small businesses, not taxpayer handouts and public works, will be at the heart of economic recovery. They will start up, create jobs, build, grow and bristle with vitality.
Some will say small businesses need handouts and top-down schemes to get moving again. But not necessarily. For a great many, getting the money that should be theirs already will be enough.
Looking at the root causes of late payment, the company policy or “prudent financial management” of larger customers, quickly points to straightforward answers.
The solution is to call late payments what they are, “unapproved debt”, set default payment terms to 30 days and require PLCs to report on their performance in annual reports.
Late payment destroys jobs
Our client, Xero’s data shows that late payments cause a cash-flow squeeze which contributes to some 50,000 small business failures each year, pre-Covid. At any one time, typically each firm is owed £24,841. This equates to around 10% of a small firm’s turnover on average.
Across the economy, it amounts to £141 billion a year of their own money that is not available for small firms to build their businesses and create jobs. Xero analysis of payment data shows that larger firms pay more slowly. On average firms in the FTSE350 pay up seven days more late than smaller firms. For decades governments have paid lip service to the problem, but they have not fixed it.
The root problem is deliberate or neglect
Late payments once stemmed from inefficient manual processes. But since then the world has automated.
Payments are now late because (a) invoices don’t get passed on to finance teams to be paid or (b) it is company policy to manage cash flow, often delaying payment for as long as possible. Remember Carillion, where payments were late and standard terms were 120 days.
Indeed, it is often considered “best practice” to pay late or impose 60- or 90-day terms. Suppliers don’t complain lest they sour relationships.
The answer is straight forward
It’s time to recognise that the late payment problem is often due to those company policies. Once that is recognised, solutions become clearer.
1. Rename late payments as “unapproved debt”. The expression “late payment” is an inadequate explanation for using someone else’s money without their permission. Calling it “unapproved debt” would help make it clear that it is not a by-product of prudential cashflow management. It would present it as unapproved finance, which should be explained or scrutinised internally and externally.
2. Set payment terms at 30 days. Too often larger firms set their payment terms at 60 or even 90 days. That may be acceptable between PLCs, but for large firms to impose these terms on small ones is not. Standard payment terms should be set at 30 days. Longer terms should still be allowed, providing firms keep track of how many of their contracts operate on 30, 60 and 90 day bands, and they are ready to explain why.
3. Require annual report reporting. It should be a reporting requirement for PLCs to set out their payment performance in their annual reports. As well as breaking down the payment terms, they should be required to explain why they are using “unapproved debt” to finance their firm.
These steps should be introduced now, when the economy needs small businesses to pick the economy up off the floor. This is not a request for a handout or a concession. It is simply to ask is that small firms be allowed to have, and use, what is theirs. It is a real opportunity for the government to show that it is helping remove barriers to growth, job creation and prosperity.