With Christmas just gone and the sales in full swing if you’ve hit the shops the chances are they will demand on the spot payment. What the likes of M&S and Monsoon won’t tell you is that in the last 18 months they have increased their own payment times to some of their suppliers.
Upwards of £30bn is tied up in late payments, costing the typical small business 130 hours a year to chase and meaning a third have to seek external finance to cover gaps in cash flow.
The problem of late payment is a perennial one but government is showing signs of getting to grips with the need – at least – to take more action. This month it has released a comprehensive paper discussing what options might be taken and inviting other recommendations to be put forward.
So, in line with our members’ concerns in the area of late payment, the Forum of Private Business is outlining four steps the government could take to tackle this area.
Firstly, the government can clarify whether the EU Late Payment Directive has been fully copied into law. The Directive became law in April 2013 and contains limits within which the public sector (30 days) and private sector (60 days) can be late in paying before a standard interest rate (8% above base rate) can be applied to debts. Because many businesses fear losing customers, they choose to not always use this legislation. So tucked away in this Directive is also the right for businesses to complain against ‘grossly unfair’ payment terms through business representatives, such as the Forum of Private Business. The idea is that a business body can represent their member anonymously and create some case law around what constitutes ‘grossly unfair’. What are the barriers to this point being reached? One is the law. The government needs to confirm that the Directive has been transposed into UK law in the correct way to allow this to happen. The other barrier is resource. Instructing counsel is an expensive business so a mechanism needs to be found to support business groups to do so. With a little clarity on the first issues, business groups can start looking at ways of tackling the last.
A second step the government can take to tackle late payment is to reintroduce company reporting requirements. Earlier this year the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 removed the need to for companies to report payment practices. Reintroducing an improved version of this, asking companies to report in standard format their payment terms and practices, would add transparency to shareholders who could hold boards to account. If the government wanted to be really radical, it could then use that information to reward good paying companies, for instance by giving an extra month’s grace before collecting Corporation Tax. This would not only incentivise larger companies to pay their suppliers promptly, but reward them too. In fact, it could even be cost neutral to the government if it led to companies choosing to pay a greater level of Corporation Tax within the UK.
Thirdly, it could consider ISO standards to see how they could be amended to require companies to pay promptly. If this could be done in a way that was friendly to small businesses and didn’t increase the administrative burden, or barriers to procurement contracts, then it would be an interesting proposal to take forward.Finally, it could embark on a programme to support businesses to be better financial managers. In some respects, this is the elephant in the room. A previous government campaign – Fitness Finance – lasted only a few months but it’s clear that a problem remains amongst some small businesses and cash flow management. Though the Forum of Private Business offers its own cash flow management guide, too many businesses don’t take advantage of the advice that is out there when a few simple changes to processes can make it far easier to chase down late payments, or prevent them in the first place.
These are four practical proposals. What is clear is that for late payment to be resolved, the government needs to pursue a number of measures simultaneously and accept that not only does it have a role to play in this area, but it needs to increase its presence as a catalyst for better payment practices.