Asking the right questions on slow payments

This article first appeared on Financial Director. Click here for the original.

As the Government announces new enhanced powers for the Small Business Commissioner to tackle late payments, Paul Christensen, CEO and co-founder of Previse, points out that, unless these are coupled with reform to Prompt Payment reporting, they are unlikely to lead to practical changes for SME suppliers.

Last week, the Government announced a raft of new measures to tackle slow payments from large corporations. These measures include new proposed powers for the Small Business Commissioner, increasing accountability for company boards on payments and a small fund to help with the adoption of technology solutions to speed up payments.

These changes have been signalled for some time, first floated last year when the Government launched a review into slow payment practices in the wake of the collapse of Carilion.

Additional accountability and transparency around payment practices are welcome. Despite reams of evidence that slow payments destroy small businesses and increasing awareness that they are inefficient for large buyers as well, progress on ending the practice is virtually non-existent.

There are a great many progressively minded people within large firms who can readily see the benefits, to their firm and wider society. By keeping slow payments at the top of the corporate agenda, the Government’s plans can help empower those people to push through change in their organisations.

However, I want to sound one note of caution. Unless these proposals are coupled with a change to the way that data on payment practices are collected, it is unlikely that these benefits will be realised.

Currently, official figures on payment practices are collected through the Prompt Payment reporting, a mandatory reporting process for firms with more than 250 employees or £18 million on the balance sheet. While the data, first released last year, marked an important step forward in terms of transparency, it includes some serious blind spots which make it very difficult to get an accurate picture of how suppliers, SME suppliers in particular, are being treated. Without an accurate picture of the way suppliers are being treated, how can the Small Business Commissioner use their new powers effectively?

There are two big blind spots in the way data is currently reported.

Size matters

Firstly, the current payment reporting gathers all suppliers of all sizes together. As far as the data is concerned, there is no difference between the time it takes to pay its largest supplier and that for an independent contractor. The data simply takes an average across all suppliers’ payment times.

Previse’s own data analysis shows that, when it comes to payment times, size matters a great deal, however. Ironically given that they are best placed to weather a more variable cash-flow situation, the largest buyers are often paid first by buyers. The smallest suppliers, those which are least likely to have large reserves and will find it hardest to raise cost-effective short-term credit to cover any shortfall, have to wait the longest to be paid.

According to our data, large buyers are paid, on average, two months earlier than the smallest suppliers. That is a significant disparity and one which is completely missed by the current reporting.

It is, however, perhaps unsurprising. Larger suppliers are likely to be in a more even bargaining position with their buyers and their contracts are likely to be the most valuable to the buyers. Therefore they are in the best position to negotiate faster payment and get paid promptly.

This is precisely why enhanced powers for the Small Business Commissioner, properly implemented, could be so impactful. The Commissioner can play an important role in levelling the playing field for suppliers which might otherwise be in a disadvantageous bargaining position.

This won’t be possible if any difference between the treatment of small and large suppliers remains hidden. Relying on self-reporting among suppliers has already been shown to be ineffective as suppliers fear damaging their relationships with buyers if they take disputes to the commissioner. Therefore, if we want the Commissioner to be able to use their new powers it is imperative that firms are asked to report separate figures on payment times for suppliers of different sizes.

The payment lifecycle

There is a second issue with the current payment reporting which further obscures the true picture for SME suppliers today, however: the figures give an unrealistic picture of how long it really takes to pay an invoice.

When we consider the payment lifecycle there are three stages which we need to take into account. Although there is variation with different buyers’ particular terms, broadly speaking the process works as follows.

Firstly, there is the time between the invoice arriving with the buyer, for example, the PDF invoice landing in the payment department’s inbox, and being input into the buyer’s payments system. At this point the ‘clock starts’ and the payment terms begin to tick down. Payment will usually occur near the end of those payment terms, say 30 or 60 days after the invoice is input into the payment system. Frequently, however, an invoice will go overdue and be paid after that payment term.

From the supplier’s side, however, the distinction between the different parts of the payment lifecycle is largely immaterial. What matters is how long it takes to get paid, from sending in the invoice to receiving the cash.

Unfortunately, the current published data only asks buyers to report on the length of payment terms and numbers of invoices overdue. This means that the time it takes to input invoices into the payment system – which can be quite substantial – is unaccounted for.

This means that, not only is the payment situation likely much worse than official figures indicate but that it is not possible to accurately measure whether any progress is being made.

In order to create true accountability on payment times, it is essential that we keep in mind the full payment lifecycle to properly understand the timeline from the supplier’s point of view. Data needs to report on time from invoice delivery through to payment, not simply approval to payment.

The fact that the Government continues to put time and energy into the slow payments issue is a positive sign, but these changes will have little practical effect if we don’t get the details right. These changes must be combined with changes to data reporting to ensure that company Boards and the Small Business Commissioner have accurate information on which to fulfil their new roles under these proposals.

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