Slow or late payments can lead to unmanageable debts, and make it harder to survive problems such as Covid or Brexit ©Getty Images
Slow or late payments can lead to unmanageable debts, and make it harder to survive problems such as Covid or Brexit ©Getty Images

Good businesses pay – on time

17 February 2022

Shortening payment terms has a powerful positive impact on smaller firms and makes for a healthy supply chain

Slow payment culture came under fire early last year when a campaign group decided to rank companies in the FTSE 100 and FTSE 250 by how they paid their suppliers. The worst offenders were aerospace supplier Meggitt (in the top spot at 132 days), Tennent Caledonian Breweries (in second place at an average 120 days), and travel operator Tui (with an average 101 days).

Terry Corby, chairman of Good Business Pays (GBP), which ran the campaign, was surprised when, on revisiting the figures months later, Tennent and Tui were no longer at the bottom of the table and Meggitt had disappeared altogether, having been acquired. Was it a coincidence that two firms named by the campaign quickly changed their payment terms after receiving negative attention? Corby thinks not. “It tells us that this is an issue the boardrooms of these companies really do care about,” he says.

GBP – an initiative backed by the Federation of Small Businesses (FSB), Confederation of British Industry and British Chambers of Commerce – uses statistics to draw attention to how long firms typically take to pay invoices, and what percentage are paid on time according to the company’s own terms. Big businesses are used to more gentle treatment, Corby believes, and argues that existing programmes set up to tackle late payers, such as the voluntary Prompt Payment Code and the statutory Duty to Report, which uses unaudited figures from the companies themselves, rely on trust so are easily abused.

Alternatives to standard payment 

Although payment figures started to improve pre-pandemic, Covid-19 largely reversed any gains, with the average time to pay rising from 36.4 days to 37.4 days. Also last year, 50,000 SMEs went out of business, according to the FSB, and Corby believes late payments are a big contributor to the problem.

“Why do some businesses choose to pay their suppliers in 30 days while others take more than 100? In bigger companies, it’s largely a decision about how long they want to hang on to the cash,” Corby says.

As a result, SMEs often have to seek alternative funds to tide them over. Late settlements might force them to pay high levels of interest on loans or even use personal savings to get by. Also, small suppliers risk a loss of confidence in supply chain finance (SCF). As part of SCF, buyers partner banks or other organisations to ensure suppliers are paid earlier, though they usually have to accept a discount to get the funds.

SCF payments offer a lifeline to cash-strapped SMEs but are controversial – Greensill Capital collapsed last year because of the failure of the backing companies. It’s another reason why GBP is campaigning for change, including introducing a statutory duty to subject payment figures to internal audit.

With the stick comes the carrot

Tackling slow payments is not simply about naming and shaming companies but supporting smaller businesses and demonstrating the value of SMEs in supply chains. It’s also about rewarding best practice.

GBP launched the Fast Payer Awards to celebrate those at the top of the pile but so far only four companies have qualified for the award: United Utilities, Severn Trent Water, Aviva and recruitment consultancy Michael Page. United Utilities says it uses several methods of support, including making payments to certain suppliers on account during the worst months of the pandemic.

Mike Potts, head of regulatory procurement and purchasing at United Utilities, says more than 70% of the company’s annual supply chain spend is on the top 50 suppliers, so it’s relatively easy to forecast and consider payment on account in times of uncertainty. “Having listened carefully to suppliers, we recognise how important it is to pay promptly to ensure a constant and consistent cash flow for them,” he says.

“We aim to pay our suppliers as soon as we can, with an average of around 13 days. At the height of the pandemic this was as quick as seven days in some instances.”

Why should you pay quickly?

For Corby, improved relationships with suppliers are likely to ensue as a result of quicker payments, among other business benefits. “In the case of a utility, you might have a contractor that is prepared to go the extra mile for you when there is a water leak on Christmas morning and the sewage is leaking into people’s homes,” he says.

And in the event of a larger problem, such as capacity constraints during the pandemic, suppliers will prioritise customers known to be prompt payers.

Building a relationship of trust and support opens many different doors, with suppliers more likely to invest the time and money in innovation – and even sustainability – and practices that increase agility in the face of fluctuating market conditions, he adds.

Although GBP will continue to give slow payers negative publicity, Corby hopes more companies will see the business value in paying promptly and taking care of vendors to nurture a healthy supply chain.

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