IN less than a year, new regulation will require all quoted companies and limited liability partnerships (LLPs) to publish information about their payment practices. The regulations won’t precisely dictate payment terms, but are intended to allow businesses to identify good and bad payers and which ones offer their suppliers terms that fit best with their business model.
The information will be published on a central online portal, made publicly available by the government. The portal will enable data to be collected on dispute resolution processes, e-invoicing, supply chain finance and preferred supplier lists. So, however good a company may deem its own practices, or whatever terms it privately agrees with suppliers, the truth will soon become apparent for all to see.
Companies will also report on their membership of codes of practice such as the government-backed Prompt Payment Code, which promotes 30-day terms as standard and incorporates a 60-day maximum limit beyond which all payments are deemed to represent ‘bad practice’. In the recent Budget, the government announced that the scope of the code will be extended to consider other poor payment practices too.
It could be fair to say that the bad practice of a few, the food retail sector being a very public example, has tarred UK plc with the same brush, creating another compliance overhead for finance directors to deal with. Equally, while markets should be governed to avoid stiflingly unfair balances of power, it’s arguable that pressure on suppliers is a predictable, healthy and natural consequence of running a business efficiently.
Certainly, the dominant behaviour of large procurement organisations is unlikely to subside anytime soon – given the current climate of economic uncertainty and commercial pressure. Moreover, business people who negotiate hard with suppliers are generally seen to be doing a good job.
A double-edged sword, perhaps; but in any event, finance directors in large organisations must work with procurement to determine how they meet their reporting obligation under the new legislation. Other companies and LLPs will be caught too if they do not qualify as SMEs under the Companies Act accounting requirements, or if they only fail to qualify because they are public companies.
As a consequence, finance director’s will be required to publish a quarterly report on their website and, in the case of groups, on an individual rather than consolidated basis. It will be finance directors who are responsible for ensuring that the reports are prepared and accurate, and if they fail to take all reasonable steps to secure compliance, they will be committing a criminal offence and may be fined.
The practical tasks necessitated by the change are potentially numerous. Although these will put pressure on both finance and procurement to establish and prove compliant processes within the next year, FDs should consider the associated benefits too. The process may well highlight current weaknesses, inefficiencies and risks to which they don’t want exposure.
For example, robust supplier contract management processes will be essential to ensure that the bedrock of terms agreed with suppliers fall within good practice. In turn, this process could reduce propensity to other risks such as inadvertently failing to renew a contract.
Similarly, it may force a review of supplier relationships and contract terms. If the business is going to have to pay on shorter terms, it may need to innovate its supply chain in order to make this financially possible. This could also fuel unexpected business growth.
The fairness and transparency of tendering processes will also be scrutinised, so companies will need to ensure that they demonstrate that tender reviews and preferred supplier lists are founded on fair practice.
The change could also necessitate a review of how supplier relationships are managed, potentially moving from a very one-sided relationship to a more collaborative, two-way flow of information, which will help to keep suppliers informed, engaged and satisfied. But this process could also lead to greater supplier self-service, alleviating internal pressure and administrative resource.
Finally, the systems that are in place to manage sourcing and purchasing processes will need to automate compliance, for example through payment approvals and triggers, and providing the right management information each quarter. But this could also improve cash visibility.
Whatever your view of the new regulation, it’s certainly going to necessitate a health check of procurement practices by FDs in order to avoid their organisations becoming known as bad for business. ?
Gerard Chick is chief knowledge officer at Optimum Procurement
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Businesses will have to think more strategically about where they can source those non-audit services in the future