Customers who delay payment of invoices can easily cause a small or medium sized enterprise (SME) to be seriously compromised, if not forced to the wall. And despite recent legislation allowing businesses to charge interest on late payments, penalties will be difficult - if not impossible - to enforce.
In an apparent two-fingered retort to the efforts to get large firms to change their payment practices, a couple of well-known companies - Rentokill Initial and House of Fraser - have responded to the new rules by extending their terms to suppliers to well beyond the standard 30 days.
However, the blame is not to be laid entirely at the door of large companies with the accusation that they use their size and purchasing importance to behave badly and squeeze the smaller independent players. Many small firms are just as bad, while some large ones can be scrupulously prompt.
Chris Pyves, a chartered management accountant, and a member of the Professional Advisors Programme run by accounting software house Intuit, said: "There is good and bad practice on both sides [which is] not helped by a culture in some organisations of not expecting to make payments until after the deadline date, and as late as possible."
Ironically, this is borne out by a recent revelation that the UK government department responsible for making sure that Whitehall pays its bills on time was one of the worst payment performers in the past financial year. In a deeply embarrassing disclosure for the government, the Department of Trade and Industry (DTI) admitted that it ranks 51 out of 57 departments and agencies in a league table produced by its own officials.
In a written answer to Parliament, e-envoy Patricia Hewitt admitted that all but three of the 57 government departments and agencies failed to meet their targets of paying bills within 30 days, at a time when ministers are attempting to change the late-paying culture prevalent throughout UK business.
working at relationships
"There is no real incentive to pay promptly unless your business depends on the supplier relationship," said Pyves. "Large businesses are able to exert more power in both the collecting and paying of invoices." Strangely, some small business managers are unaware of the damage that the culture can cause, particularly in terms of unnecessary overdraft interest payments and a lack of cash for investment. "Even if they see the problem, many small businesses do not have the resources to chase reluctant payers as they are too busy trying to produce and deliver their goods and services," he added.
Simon Larter, of PR agency Motive, points out that getting angry and resorting to legislation do not enhance a business relationship, and if penalty legislation and recourse to the courts is what it takes to get paid in a reasonable time, that relationship, along with business procedures, needs to be examined.
"The problem is that in the UK there is a deep distaste of discussing money openly, and few companies or business managers make their terms of business clear at the outset," he said. "Payment terms should be highlighted at the outset, and, where necessary, can be part of the negotiations. If the rules are clear there is a better chance that customers will pay on, or before, time."
Even when late payment penalties are legal and encouraged, Larter doubts whether many firms will actually try to enforce them. "Deep in our subconscious there is something that says it is terribly un-British to charge interest for late payments. I bet that most companies will not charge in case it affects and rots the relationship. However, I would say that if late payment is a serious problem, the relationship is already rotten."
Pyves goes even further. "You could speculate that our economy is to some degree geared to late payment, with the banks offering overdrafts and firms charging for extended credit as a source of revenue which would be lost if everyone paid on, or before, the payment due dates," he said.
However, despite a conspicuous failure to keep its own house in order, the government has been attempting to rectify the situation and change the culture. The Late Payment of Commercial Debts (Interest) Act 1998 gives businesses a statutory right to claim interest on late payment of debts. In November this year, the Act will be extended to SMEs, and the government claims that it wants to encourage businesses to agree their contractual terms and impose interest if bills are late.
A visit to www.dti.gov.uk/latepay/ or www.payontime.co.uk explains what small firms are entitled to do and should be doing, although Pyves doubts whether the Act will be widely used. "There is a power issue here and the cards are stacked against the smaller firms," he said. "The government is still living in the dark ages as far as the small business community is concerned. Despite what they say, their actions are completely at odds with their stated position."
"Recently, I had occasion to talk to the Inland Revenue on behalf of a small business that has just been trading for its first year. In my opinion, it has been doing very well but such growth has placed enormous strains on its cash flow. Yet because the Revenue's attitude was one of complete disinterest to the benefits that the growth of the company would have on the local economy, it is being forced into an untenable position with its suppliers, mainly because the Revenue and VAT are preferential creditors," he added.
Pyves would like to see the creditors' ranking list being completely reversed so that the smaller the business or the less time it has been established, the higher you are on the list of preferential creditors. "Banks and government departments would be at the bottom of such a list. After all, we all end up paying for this money one way or another, so why not protect those who are the most vulnerable," he said.
Managers should use various practices and processes to ensure prompt payment, so that it becomes unnecessary to charge interest. The practice of prompt payment starts when you have a new customer.
David Hands, of the Federation of Small Businesses (FSB), says that new customers should be asked to complete a credit application form with a signature to agree to the stated terms, and excessive credit should not be extended to unknown customers, however large they are.
"State your credit terms as boldly as the price and product description and show them clearly on quotations, order acknowledgements, invoices and statements," he advised. "Make sure your invoices contain everything that the customer needs to pay you quickly. Many stall by saying that they didn't know how the supplier wanted to be paid." One easy step is to print your bank details on the invoice encouraging the customer to send payment direct to your bank instead of sending you a cheque.
"Companies just don't want to charge interest. A lot of our customers have one or two very large customers and often they are the ones that keep them in profit, so they are hardly likely to want to upset them," said Hands. It is certainly true that to use the late payment legislation could well be a form of business suicide, at least in the current climate and culture.
A carrot and stick approach is advisable. Offer a customer a discount for prompt payment, as well as making it clear that you intend to charge interest on late payments, even if you know you will not.
The European model
This may be one area which could benefit from a closer union with Europe. In Germany, for example, prompt payment is assumed and is the cultural norm. In France it is a criminal offence to issue a cheque without funds to support it. If such principles of trust - reinforced by law - became the standard in the UK, the problem could well go away.
There are changes happening, however. Listed companies already have to state in their annual accounts how long it takes them to pay their bills, and the 'naming and shaming' effect might alter attitudes. The advent of ecommerce, and e-billing in particular, is likely to introduce automation and better practice. The BACS direct payment organisation is also taking an early initiative and says that by encouraging SMEs to make and receive payments electronically, the issue of late payments, and the potential problems it causes, is likely to diminish.
Other, harsher systems being suggested are an electronic escrow system, where payment is made when goods or services are ordered, and the payment is held by a third party until the goods are delivered or services provided. A website called www.smarterwork.com offers this service even to small independent freelance workers.
But the best way to ensure fast payment ahead of the standard 30-day limit is to have a good business relationship which is based on mutual respect. This, combined with discounts for prompt payment and a culture within which late payments are bad form, might start changing things for the better.
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