Payment culture crucial for coronavirus economic recovery

9 April 2020: prompt payment practice is one of the most important factors that will enable the UK economy to recover quickly after the coronavirus crisis, a new ICAEW webinar has highlighted. Rachel Underhill, Senior Business Strategy Manager at ICAEW, reports.

When ICAEW planned the In conversation with the Small Business Commissioner webinar earlier in the year, we couldn’t have imagined how different the world in which businesses are now operating would be. We also couldn’t predict just how much more important the issue of late payments would become. 
 
In an article from January 2020, Iain Wright (Director for Business and Industrial Strategy at ICAEW) said: “if everyone paid within 30 days, some 50,000 small businesses that went bust in 2014 would have stayed in business and the economy as a whole would have grown by £2.5bn.”. We now face a situation where paying on time through the supply chain, especially for smaller businesses, could make the difference between the economy being able to recover relatively quickly after this pandemic and a long, sustained downturn. Bluntly, the issue of making prompt payments is the single most important factor which could mean that tens of thousands of businesses, with all associated jobs, surviving. 
 
Philip King, interim Small Business Commissioner, started the webinar by laying out some stark facts about the late payments landscape in the UK: there is currently £23.4bn of outstanding SME late payment debt, and 24% of SMEs have to pay their suppliers late due to late payment further up the supply chain. These figures were collated before the coronavirus pandemic, but speakers on the webinar said there had been a significant rise in queries in March due to the outbreak. Perhaps unsurprisingly, the sectors most affected are retail, hospitality, leisure, construction, engineering, healthcare, business services – with the biggest rise being in retail. 
 
Two clear themes emerged throughout the session. Culture is the most important thing in developing good payment practices, and small businesses should contact the Small Business Commissioner if they have any late payment or poor payment issues. Finance professionals need to see the way payment culture is changing and make sure they are on the right side of it. 
 
Prior to the pandemic, there had been an upward trend in businesses lengthening their contract terms. This week the Small Business Commissioner has been sending letters to organisations that have done this to try and stop this happening. His office currently has a 100% success rate on getting late invoices paid if a complaint is made to them, so the key message throughout the webinar was to get in touch with them – particularly if you have invoices outstanding that will help you through this difficult time. The reputational damage of paying late cannot be underestimated by big businesses and an early discussion with the Commissioner’s Office may mean that additional action is unnecessary.
 
Given the current climate, it was acknowledged that many small businesses will be worried about their immediate survival, their future and their cash flow. When cash dries up, businesses fail. Government initiatives are starting to reach businesses, but some are not there yet, adding real pressure to owners and directors. 
 
To help with this, caseworkers from the Commissioner’s team are helping small businesses see if there is any money outstanding to be paid. They are also encouraging and supporting large businesses to support the SMEs in their supply chain.
 
The Commissioner also published an open letter to all businesses last week, asking them to think about the impact of poor payment practices. There have been instances of businesses issuing a blanket email to all of their suppliers, saying that they will not be able to pay invoices until after the pandemic. What the Small Business Commissioner wants to do is to get businesses to work in the spirit of collaboration, not confrontation. The plea is that businesses should now look at their supply chain and identify those that are most vulnerable. 
 
This is a particularly important point when considering the uptake in mental health services at this time. Ask any small business owner what keeps them awake at night and it is invariably keeping the business going and paying staff. This is even more acute at such a worrying time like this. Conversation and collaboration are key to getting through this together.
 
Of course, if a client that pays late constitutes a significant part of a small firm’s turnover, SMEs feel pressure to accept this and don’t want to lose business by complaining, but what many don’t know is that the Commissioner’s services can be confidential and anonymous. If getting these payments would make a difference, it is worth raising and conversations can help change businesses behaviour without going to the investigation stage.
 
Yvonne Gale, a panellist on the webinar as well as an ICAEW member and NED for the Office of the Small Business Commissioner, explained that she wanted to get involved as she had lost count of the number of SMEs being paid late or forced to take on onerous payment terms by bigger corporates. She also urged all finance professionals to think of payments at a systems level as opposed to a purely short-term transactional level. In the long run, paying late to hoard cash is not good: reputation is hard-won and easily lost, and businesses tend to pay for this mindset eventually. 
 
Finance departments require a lot of resource if accounts payable are constantly being chased up for payments and they need to firefight more. Businesses may not immediately account for the additional cost of this approach but in the long run, it does incur a burden, both reputationally and financially, and these costs will invariably outweigh what you may gain from paying late. 
 
It was also remarked that late payments needed to be a board issue and that boards should ask the question: If the business had to pay interest on all their late payments, how buoyant would the balance sheet be? This helps to construct conversations around reputation, brand and the viability of the business.
 
One delegate asked if there was a kitemark for those who treat suppliers well, which led the conversation on to the Prompt Payment Code. Signatories can use the logo to demonstrate good practice and can be suspended from the Code if they don’t uphold high standards. For more information on the Prompt Payment Code, please click here.
 
It was also asked if the Commissioner had any remit over multinational companies. It was made clear that if transactions and/or the contract is held in the UK, the Commissioner can get involved- but if the activity was overseas, they cannot. 
 
The issue of government sometimes being slow to pay was also raised. Whilst the Office of the Small Business Commissioner has no public sector remit, they are frequently contacted about this so it has been made known in government that this must be resolved. There has now been a Procurement Policy Note issued by Cabinet Office (PPN 02/20) which states that during COVID-19 work should be done to contact suppliers that are most at risk to reassure them of payment, put in place measures to support supplier cash flow and pay invoices immediately on receipt with reconciliation to take place later. Businesses should use this when speaking to the public sector during this time.
 
Lord Mendelsohn’s recent payment terms bill was also raised. The provision of the bill is that all payment terms should be 30 days amongst other things. It was noted that mandatory 30-day payment terms may not be necessary, as many pay more quickly than this, and experiences from Europe show that if you legislate payment terms, businesses will not pay quicker than the 30 days. 
 
There was also a question raised around whether excessively long payment terms or late payments are the biggest concern for the Small Business Commissioner. It was quite clear that the bigger issue is not paying to term - for businesses, the main concern is certainty. If they can plan, they are far better able to manage cash flow.
 
One delegate asked why businesses should contact the Small Business Commissioner over a commercial debt collector. King and the team were clear that they are a free service, and they will always try to keep the commercial relationship intact. For many, utilising a commercial debt collector is a nuclear option, and the Small Business Commissioner can act as the step before that. They also endeavour to take the stress out of the situation and look to maintain the ecosystem in which businesses operate.

Contact the Small Business Commissioner:

Website: www.smallbusinesscommissioner.gov.uk
 
General advice: enquiries@smallbusinesscommissioner.gov.uk
 
Send your complaint to: complaints@smallbusinesscommissioner.gov.uk
 
Telephone: 0121 695 7770