Since the collapse of Carillion over a year ago, tackling slow payments to suppliers has maintained a spot as a key priority for the UK Government. Not a month goes by without a new announcement on targets or new sanction powers against slow payers.
While slow payments remain a widespread problem across both the public and private sectors, the Government has chosen to lead from the front on this issue by pushing public organisations and Government departments to set new standards of best practice when it comes to payment terms. Public sector organisations are required to pay suppliers within 30 days, while private sector contractors working with public sector organisations are asked to pay at least 95% of their invoices within 60 days.
This ambition should be welcomed. With public sector procurement standing at around £223 billion a year, meeting these high standards would make a huge difference to thousands of UK SMEs as well as the wider economy.
However, with public sector organisations working to deliver vital day-to-day services on tight budgets, speeding up payments is easier said than done.
In many cases, public organisations in fact lag behind large private businesses. Almost two-thirds of public sector invoices are paid late. There is little evidence that these figures are improving significantly.
This is far from an issue of simple poor administrative practices on the part of these organisations. For example, in the health sector, when asked why they struggle to pay invoices on time, NHS Trusts cited a lack of short-term cash flow as a primary driver. In past years, many Trusts were reliant on short term working capital loans to pay staff and invoices.
An opportunity, not a burden
Any attempt to improve public sector payment practices must, therefore, contend with the realities of many organisations’ financial situation and be realistic about what is possible within their operating environment. However, once an appropriate solution has been found, speeding up payments can also bring a number of key benefits beyond simply adhering to Government policy.
In particular, prompt invoice payment has a significant impact on the health and stability of the supply chain feeding back to buyers in the form of greater stability and even reduced prices.
Slow payments are one of the biggest challenges for SME-sized suppliers. The cash flow challenges that they throw up force firms to cancel orders, take out sizeable loans at uneconomical interest rates and even force the closure of 50,000 UK SMEs each year. The costs of such disruption are far from negligible for the end purchaser. Figures from AgC show that three per cent of suppliers’ total turnover is spent on the cost of debt.
With public organisations always looking to do more with less, simply cutting the cost of slow payment-related debt would make a significant contribution to bringing down costs.
These benefits are material and meaningful for both public sector organisations and the broader economy. Yet, with the challenges outlined above, how can payment speeds be improved without endangering the short-term cash position of buyers?
We believe that artificial intelligence technology, combined with the vast amounts of data in the invoices received by buying organisations, offer a completely new approach to speeding up payments without requiring major process change or straining buyers’ cashflow.
Previse’s InstantPay uses cutting-edge, proprietary artificial intelligence algorithms, developed in our Glasgow and London developer hubs, to provide a highly accurate prediction of whether an invoice will be paid.
The algorithms can make an assessment and therefore payment as soon as the invoice is received by the buyer. Unlike traditional supply chain finance programmes, there is less administration, as invoice approval is not required from the buyer and it means that early payment can be extended by as much as 20 days faster compared to traditional supply chain finance programmes.
Representing such a sizeable proportion of procurement in the UK, the public sector has an incredible opportunity to take a lead on solving one of the biggest challenges facing small businesses in the UK. With Previse InstantPay, we’re able to ensure that even the smallest suppliers are paid instantly, while at the same time reducing the burden of process for public sector organisations – a true win-win for the whole ecosystem.