Cash delays are bad for business

8 August 2001
More legal news

09 August 2001

Purchasers find themselves stuck in the middle of tussles between suppliers and their own finance departments over late payments, writes David Arminas

Relationships with suppliers are built over time, usually with a lot of hard work and patience from procurement professionals. Late payment to these suppliers could throw the entire relationship into disarray with damaging consequences.

Non-payment or late payment can affect a supplier's ability to perform to, or indeed improve on, contractual specifications expected by the very client holding back on payment. In the most extreme cases, it could force a supplier to the wall.

In any event, it spells problems for purchasers, especially when they find their business-critical supplier - perhaps the only one for a particular manufactured part or service - refuses to continue with the relationship until payment times improve or are met. Embarrassingly for some procurement heads, discussions with the supplier on late payment may be the first time they are alerted to the problem. This adversely affects their bargaining power with their supplier.

Ongoing problem

Our news stories suggest late payment remains a problem, despite legislation allowing small businesses to pursue arrears in the courts. A study from the Federation of Small Businesses reveals that the average time for payment in the private sector remains at 46 days, instead of the standard 30-day contractual arrangement, and that this has not improved in three years.

And while the public sector is aware of the problem, central government is also struggling with prompt payment, according to Department of Trade and Industry figures.

All this at a time when the economic conditions have been relatively good. When economic times get tough, bills are likely to remain unpaid for even longer. According to some analysts, the economy is not about to pick up and the situation will not be as short-lived as previously thought.

A hoped-for deterrent against late payment is the government's Late Payment of Commercial Debts Act (Interest) Act 1998 which allows small firms to charge clients interest on late payment at 8 per cent above the Bank of England's base rate.

The final part of the act comes into force in November 2002, when large firms will be able to charge interest on debts from small firms, which up to now have been shielded from the charges.

Moving the UK legislation further forward is an EC directive now under consultation in member countries. On top of the interest, there will be a legal right to charge reasonable compensation from the debtor for all relevant costs incurred as a result of late payment.

But the survey from the Federation of Small Businesses shows the act has hardly been used so far. analyst Dun & Bradstreet say that nine times out of 10, it is the finance department that decides who gets paid when.

In essence, a buyer's carefully built-up relationships could be jeopardised by the finance department's payment decisions. A small supplier of a common, easily purchased part could see its performance worsen as a result of late payment by its major clients. It will not use the act because its client may quickly switch to another supplier of the same part, leaving the original firm with worse cash-flow problems.

If a company gets a name for late payment, attracting new suppliers where suppliers have a choice of clients could be a problem for procurement people. This could also lead to higher prices because of the higher risk of being a supplier.

What role do purchasers have in improving the late payment situation, especially as nine times out of 10 payment schedules are handled by finance departments?

It may already be that the finance people understand who are the small but essential suppliers and prompt payment to them is reasonably assured. But purchasers have a key role in establishing a good relationship with the finance department to ensure they understand late payment implications for the overall business strategy.

SMaug2001

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