According to research by payment processing organisation Bacs,
small business owners in this country claimed they experienced fewer late
payment problems in 2007 than the previous year. Yet the findings of the
research uncovered figures that showed that outstanding payments owed to small
firms had leapt by £2.6bn to a massive £18.6bn.
This is clearly a bigger problem than the odd customer being sloppy with putting
that cheque in the post: the average amount outstanding to a small business at
any one time is £30,000. Almost one fifth of small firms now employ a dedicated
person to chase overdue invoices and the average company loses around 17 days
per year on this onerous task.
The knock-on effect of course is deadly serious. Almost a third of firms
questioned by Bacs claimed they would go bust if faced with an amount owing of
up to just £20,000.
Depressingly, just as it had looked as if the late-payment culture had become socially unacceptable, a number of big firms have employed the technique in a highly structured way to bring about significant benefits to their accounting position. Last year, private equity-owned clothing group New Look announced that it was extending its payment period to suppliers from 60 to 75 days.
Ahead of its float, Debenhams took a similar step in order to strengthen its balance sheet ahead of listing on the London Stock Exchange. Owen James, a director at credit management firm Intrum Justitia, said financial directors at small companies were bearing the brunt of such delayed payments as they were especially vulnerable. "Small businesses are faced with a combination of large players who do not pay promptly, and other small businesses that delay payment to protect their own cashflows," he says.
So with the threat coming from all angles, a defensive approach to tacking the problem is perhaps the only sensible option. Bill Barrott from the Better Payment Practice Group said: "Considering the dangers inherent in late payments, it is amazing how many companies do not take precautions to protect themselves.
"We are committed to improving the payment culture of organisations trading in the UK and have established a Better Payment Practice Code, which urges firms to adopt a responsible attitude to paying on time. Working together with organisations like Bacs we can offer expert advice and guidance to UK businesses, and help minimise the impact of problems associated with late payment."
"Small businesses need to keep on top of their debtor book and make sure it takes priority," says Carol Kyle, senior manager of lending services at the Co-operative Bank. "Too many small businesses are so focused on achieving sales that they fail to ensure that they invoice promptly and chase non-receipt of payment.
"There is also often a tendency to keep doing business with customers who have a history of not paying on time. Businesses need to treat slow or non-payers with caution and either insist on cash up front or even refuse to do business with them unless invoices are settled promptly."
It's a tough stance to take, of course, and one that many smaller traders are wary of taking for obvious reasons. Kyle explains: "Sometimes a business needs to consider whether it's still worth keeping a long-term client on their books if their payment terms are problematic. More businesses fail because of cashflow problems then anything else - a client may seem good in that they buy a reasonable amount from the business but if they don't settle then they threaten to cause serious problems to the business."
She adds that the cost of chasing the debts - and of increasing cashflow support on overdraft facilities for example - will eat into the profitability of the contracts anyway.
Simple steps
David Willletts, a business consultant and owner of DAW
Consulting, says that there are a number of simple steps all small businesses
can take to encourage a healthy flow of payments. "Small firms should invoice
promptly; transmit the invoice electronically to ensure delivery of the document;
ensure invoices are error-free, complete and meet all the customer's
requirements; and confirm well before payment due date that the sales invoice
has been posted to the customer's purchase ledger and will be paid on time. If
necessary, send an email confirming the conversation and the promise of payment."
Willetts emphasises that, of course, prevention is better than cure in every instance. As such, good practice advice for keeping on top of amounts due includes:
- Seeking payments on account, if appropriate;
- Regularly checking the creditworthiness of customers;
- Raising pro-forma invoices until a satisfactory commercial relationship has been developed with new customers;
- Retaining all evidence of delivery of goods or a signed Satisfaction Note for services provided.
Legislation brought in to tackle the issue of late payments appears to have had a mixed effect so far. While circumstantial evidence suggests that some businesses have been able to use the rules brought in under the Late Payment of Commercial Debts (Interest) Act in November 1998 to encourage debts to be settled, the latest Credit Professional Index released by the Credit Management Research Centre (CMRC) at Leeds University Business School shows that late payment by UK companies is still higher than it was seven years ago.
Its research shows that the number of days overdue stands at 17 days on average. The lowest point of 16 days overdue, recorded in April-June 1999, has not been reached during the last seven years.
This is all in spite of the fact that the Act - along with various government interventions - was specifically introduced to tackle the domestic late payment culture in the UK. Further findings show that the overdue time for UK firms being paid from customers' overseas has significantly risen during the same period from a low of 13 days in late 1999 to 21 days in mid 2006. This is despite further amended European Late Payment Legislation - introduced in 2002 - aimed at improving the payment culture among the wider European community.
Professor Nick Wilson, director of the CMRC, says: "The figures produced by the CMRC show that the net credit position of UK business clearly fluctuates according to the economic cycle and we see signs of smaller companies being stretched by both suppliers and customers."
The Co-operative Bank's Kyle concedes that the practice of delaying payments is always likely to be there but, she adds, often a supplier will offer discounts for prompt payments or even - as a last resort - stop supply in order to encourage amounts to be settled.
There are of course no givens in this area and a business needs to keep in communication with its suppliers and meet the agreed terms if the relationship is going to continue to be workable.
"It can be helpful to have a solicitor on stand by to do a standard letter to chase overdue debts," says Kyle. "Otherwise, the small claims court is always an option for businesses with the threat of a county court judgement against a debtor often triggering settlement. The important thing is to act quickly rather than keep extending deadlines."
