Tax & admin 3 February 2017

Big business under the spotlight: How to manage late payments

Manage late payments
Clear guidance and mutually agreed terms are some of the effective ways to manage late payments

Writing for Business Advice, Henning Holter, head of business development at invoice finance firm Tungsten Network, considers the government’s latest effort to combat poor supply chain behaviour in Britain before advising small business owners on how to best manage late payments.

This week, action to tackle late payments took a step forward, as the government announced a crackdown on large companies that fail to adequately disclose their payment performance.

As of April, large firms will be legally required to publish details of payment practices on a website set up by the Department for Business, Energy and Industrial Strategy (BEIS). If businesses do not disclose twice a year the treatment of suppliers, these companies and directors will face criminal proceedings and potentially significant fines.

By BEIS’s own estimations, bad payment practices are to blame for tens of thousands of business failures every year. This new regulation will go a long way to fixing what some believe has become an endemic problem here in the UK.

As our research shows, this is indeed a significant problem to be aware of. We found that nearly a quarter of all small and medium sized businesses in the UK are facing a potential financial crisis due to late payment of invoices.

Our research shows the average small business is owed £40,857 in unpaid invoices, with £20,937 of that total overdue. When applied across the UK’s 5.2m small firms, the total owed could be as much as £212bn.

The Federation of Small Businesses (FSB) estimates that if suppliers are paid on time, each year some 50,000 business failures could be prevented. The organisation has welcomed the government’s latest attempt to address the issue, with chairman Mike Cherry calling for the regulations to be “robustly enforced”.

Small firms up and down the country will no doubt welcome the sharper focus on payment practices that the BEIS’ announcement will hopefully bring in the coming months. It also represents a timely opportunity to revisit their own relationships with businesses they work with.

How to manage late payments

Off the back of the government’s crackdown, small businesses are well advised to focus on how they themselves are affected by the late payments culture, and there are a few simple measures they can introduce to ensure they are treated in a positive way.

1. All involved should agree the terms at the outset of a new contract

If 90 days is proposed as standard, it’s still ok to push for a shorter payment term. Some businesses will be happy to oblige, others will undoubtedly not be, but still make the effort to ensure it happens.

Take this negotiation up front, however – it is too late to attempt to change payment terms retrospectively.

2. Request clear guidance on payment procedures

This covers such formalities as when a payment term commences. Many businesses are now using online invoicing platforms to enable suppliers to check invoices have been received and when payments are due.

This can be invaluable when it comes to planning activities and managing your cash flow.

3. Do follow up on late payments

Responsible businesses should have a system for dealing with complaints and disputes, so it is reasonable to expect your concerns to be dealt with in a timely and considered way.

Don’t ignore it when a payment is late and don’t be afraid to put the spotlight on it.

Finally, make sure you have adequate working capital arrangements in place to handle the payment terms, whatever they are.

There is a wider shift in people’s approach to business finance, and with fintech solutions offering easier access to finance for smaller businesses, there are more opportunities to receive early payment if the cash is required more quickly for growth.

The good news is that we are entering an environment where uncomplicated access to cash on reasonable terms is no longer reserved for the largest of businesses.

In summary, when dealing with the businesses supplied to, it’s important that smaller firms feel on an equal footing.

It’s fair to request that payments are made on time and the process is communicated clearly. It’s also important that small businesses encourage good practice within their own supply chains, by paying their own suppliers on time and being clear on what they can expect in terms of payment procedures.

Unfortunately to date, the late payment culture is one that has been allowed to pervade the British business community. No more, perhaps, as the government cracks down on an attitude that is both lazy and anti-growth.

Ensuring a sustained cash flow is vital in any business’s lifecycle, so a rethink of how we all approach it is something to be welcomed.

An entrepreneurial spirit, prompt payments and a clear strategy can allow any small business to shine. We are, after all, all buyers and suppliers at some stage in our business lifecycle. It is time we tackled the payment culture once and for all.

Looking for further advice on how to manage late payments? Check out our legal expert’s series on tackling supply chain bullies

Henning Holter is head of business development at Tungsten Network

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