A new campaign by the Federation of Small Businesses (FSB) has urged Philip Hammond to use the upcoming Spring Statement to outline his vision for combating late payment. A year ago, the chancellor launched a call for evidence on ways the government could “eliminate the continuing scourge of late payments.”
The consultation ended in November 2018 and officials have spent the last few months assessing the responses. All eyes will be on Westminster on March 13th to see if the Chancellor takes decisive action.
Why are late payments such an issue?
Financial directors understand the necessity of prompt payment, especially when it comes to maintaining a healthy supply chain and preserving important business relationships. When it goes wrong however, the consequences can be severe and cause long-term reputational damage.
More than a year on from the collapse of Carillion, the effects are still being felt by hundreds of companies. As a result, the FSB’s campaign Fair Pay Fair Play has presented three reforms that it believes will set a clear path towards ending the UK’s poor payments culture.
Firstly, it would like large businesses to show whole-board ownership of the issue by appointing a Non-Executive Director who would have responsibility for payment practice and be required to provide a summary of their activity for the company’s Annual Report.
Secondly, the FSB is asking for stronger payment enforcement for those businesses that behave poorly when it comes to payment practices. Ideas on the table include making the Prompt Payment Code mandatory for all FTSE 350 companies and fines for companies that do not adhere to the Duty to Report requirements. Also, the Small Business Commissioner could be given the ability to undertake mystery shopper style investigations into the payment practices of large firms and investigate supply chain bullying.
Finally, it would like to see Project Bank Accounts adopted for major procurement projects so that small public sector suppliers are guaranteed prompt payment on completion of their work.
Time for serious action against ineffective processes
According to research on late payment from Tungsten Network, one in four businesses are at risk of insolvency due to the late payment of invoices. Interestingly, it isn’t always wilful neglect or deliberate cash flow management that leads companies to pay late.
Our further research into the causes of friction in the supply chain also found that, on average per week, businesses spend 55 hours doing manual, paper-based processes and checks; 39 hours chasing invoice exceptions, discrepancies and errors and 23 hours responding to supplier enquiries. That’s roughly the equivalent of having three full time employees just to manage unnecessary invoicing inefficiencies.
These cumbersome and time-consuming tasks add a huge amount of friction to the payment process and inevitably delay payment to suppliers. It is frustrating to hear of so many payment teams bogged down in outdated payment methods when the process could be automated, leading to huge time, cost and efficiency savings.
Innovative technology could hold the secret
In October 2018, Small Business Minister Kelly Tolhurst announced that she wanted to explore the effectiveness of innovative technologies, such as e-invoicing and other accounting software, to help small firms manage their payments processes. This is a positive and modern way of looking at the issue and our late payment research shows, beyond doubt, that when businesses digitise their accounts departments, the payment process speeds up.
Digitising your invoicing processes also opens up the possibility of boosting transparency and strengthening relationships within your supply chain. When suppliers can check the invoice status online and therefore don’t have to waste time on both sides chasing for updates. As a result, calls and emails are usually reduced by 60%, increasing productivity, cutting costs and enabling staff to focus on the real work of growing the business. In addition, e-invoicing also minimises or eradicates the possibility of invoice fraud, error and duplication and can bring down the cost of handling invoices by more than 50 per cent.
Multiple governments have tried and failed to change our payment culture but it will only be when the business community takes responsibility for its own practices, that real progress will be made. Instead of focusing on penalties for poor behaviour and applying pressure to boardrooms, we believe the Government would be well-advised to champion e-invoicing as a concrete and more positive way to eliminate late payment.
Not only does e-invoicing breathe life into supply chains and ease cash flow for smaller suppliers, it also brings payment processes into the 21st century, improving efficiency, accuracy and ultimately, saving your business money. Its hard to believe that any open-minded business leader would be resistant to this proposal. Hopefully the Chancellor will use his Spring Statement to start encouraging businesses in this direction.