By the end of November, the UK’s largest companies and LLPs should have started submitting their first round of data concerning their payment policies, practices and performance. The Department for Business, Energy & Industrial Strategy (BEIS) introduced this half-yearly reporting cycle from 6 April 2017 with the explicit hope of reducing late payment to SMEs.

The new regulations apply to large and medium-sized companies which meet two of the following criteria: have 250 employees; a turnover over £36 million; or a balance sheet over £18 million. Businesses must publish information about their payment practices and performance on a Government web-based service within 30 days of the end of the reporting period, hence the 30 November recent deadline.

Only time will tell how many organisations have missed this first deadline but BEIS will fine firms that fail to provide updates. While this “name and shame” approach shouldn’t be necessary, it is a reality that late payment continues to cripple the nation’s SMEs. No matter how much is written about the knock-on effect to other businesses, companies can still end up delaying payment for a number of reasons and cash flow quickly becomes a challenge.

Bad news all round

I recently read some research that stated that around 40 per cent of British businesses have received a late payment in the last month. This resulted in them having to take radical action to protect cash flow such as making redundancies, stopping planned investments, being unable to pay salaries and reducing innovation spend. Our own research supports this, having found that a quarter of UK SMEs are at risk of insolvency as a result of late payments. This is very bad news for our economy at a time when we want to be doing all we can to boost productivity.

While the Government’s approach may cause some firms to improve their payment practices, we believe there are numerous, more complex and entrenched reasons why businesses don’t pay on time.

Tungsten Network’s Friction Index research, carried out in conjunction with the Institute of Finance and Management (IOFM), sought to explore some of the sources of friction in the supply chain. When we spoke to procure-to-pay professionals from around the world they listed all sorts of reasons why they might slip into poor payment practices. For example, nearly two thirds (64%) of businesses cited slow internal processes as the biggest obstacle to timely payment; 39 per cent lack of automation; 27 per cent administrative errors; 20 per cent team capacity to manage the volume and just 16 per cent said they delay payment to manage cash flow. So it is less about large companies taking advantage of their smaller vendors, and more about inefficient operations even at the largest corporations.

The heart of the matter

These challenges – slow internal processes, lack of automation, errors – just don’t get the airtime they should. They might not sound exciting but addressing these problems could transform the payment performance of the nation’s firms and it certainly helps us get to the heart of the matter.

Rather than thinking companies are deliberately withholding payment, our research suggests that much of the problem seems to stem from the way Accounts Payable departments are run and some of the outdated methods they use. Too often, slow paper-based systems where invoices are manually processed and passed from department to department are causing friction in the supply chain.

Encouragingly, staff are aware of the situation. In our research we found that almost half (47%) of businesses admitted that at least one in 10 payments to their suppliers are made after their agreed payment terms. Only five per cent said they always pay their suppliers in the time promised and one in 12 said they fail to monitor their payment practices altogether.

Supply chain poison

The consequences of late payment are never-ending. Not only may it trigger severe cash flow problems, but it also poisons relationships in the supply chain. Having to pick up the phone to chase for payment is embarrassing and frustrating for suppliers and buyers alike and distracts workers from the main task of building and growing businesses.

So what can be done?

In our global marketplace, arranging invoice payments can be a complex task, particularly if they’re cross-border and involve ensuring compliance with local tax laws. It is unsurprising that such involved processes often result in delays, particularly if back office systems are still paper-based.

That’s why we describe ourselves as digital evangelists dedicated to accelerating global trade through the intelligent use of data and the death of paper. We really believe that automation can eliminate so many Procure to Pay (P2P) problems and facilitate timely payment. Paper-based processes must be a thing of the past.

At a time when so much of our business and personal lives are digitised, it seems madness to have teams of people handling paper invoices and spending hours on the telephone responding to enquiries. By digitising the process, suppliers can check the real-time status of their invoice at any point online. This helps to reduce calls and emails by around 60 per cent, increasing productivity for your staff and cutting costs. It can also strengthen supply chain relationships and improve collaboration.

Electronic invoicing increases the efficiency and accuracy of your accounts payable team so administrative errors should be a thing of the past and the number of people required to manage the process is much reduced.

Bringing automation into the back office is liberating and without doubt, the only way forward. E-invoicing can help eliminate so many of the issues that currently cause late payment and bring unexpected, additional benefits such as improved supply chain collaboration, greater efficiencies and cost savings, and access to more efficient working capital management solutions.

Henning Holter, Head of Global Business Development, Tungsten Network Finance