Yet again, the UK Government is looking into the issue of late payments. In this year’s Spring Statement, Philip Hammond, the Chancellor of the Exchequer, expressed his desire to investigate further how late payments can be eliminated. He announced a “Call for Evidence” into the issue.
Influential trade bodies and small businesses welcomed the initiative as late payment is widespread and puts unnecessary strain on thousands of small businesses. The Federation of Small Business (FSB) warned the Chancellor that more than four in five companies are being paid late and that one in three businesses claim the situation is getting worse rather than better.
This is despite the fact that the Government has tried to strengthen the Prompt Payment Code (PPC), and introduced legislation that requires larger firms to report on their payment practices. So far, none of these acts have generated the desired change in payments culture.
Ineffective payment code
In fact, our own analysis of the reporting figures reveals a worrying trend. Participation in payment codes, such as the PPC, seems to make no impact on time to pay. We found that PPC signatories take on average 44.6 days to pay, whereas those who haven’t officially signed up take 44.7 days. In addition, more signatories (36%) fail to pay their suppliers within the agreed terms compared to non-signatories (30%). These are some shocking figures.
While businesses of all sizes welcome the sentiment of the PPC it appears that not everyone is practicing what they preach. So what is it about the nation’s payments culture that is holding progress back?
Disastrous chain reaction
We know for sure it isn’t naivety about the impact late payments have on businesses. Countless articles have been written about how firms are routinely running into cash flow difficulties as a consequence of late payment and relying on overdrafts and emergency loans to bail them out. FSB research claims that in one year alone, around 50,000 business closures could have been avoided, if payments had been made to terms.
This was further demonstrated with the collapse of construction titan Carillion. It was revealed that Carillion, despite being an early signatory of the PPC, sometimes paid its subcontractors as much as 120 days late. Following its demise, it owed around £1.5bn to 30,000 suppliers who now face an uncertain future.
Mike Cherry, National Chairman at the FSB said: “Sadly this sorry saga has laid bare the frailties of the Prompt Payment Code. While it is fundamentally a good idea, it does not work when it is most needed – as shown with Carillion’s behaviour since July 2017.
“Although they were signatories of the PPC, Carillion were able to use their dominant position to squeeze smaller firms to mask their own financial failings. This irresponsible behaviour has put many small businesses in jeopardy, with countless people fearing for their jobs.”
The FSB is now calling on the government to strengthen the PPC further by making it mandatory for all FTSE 350 businesses and introducing a tough penalty regime for companies that flout the rules.
A fresh perspective
However, legislation can only go so far. What underpins the late payment debate is the outdated technological infrastructure and tedious, manual steps that support many companies’ procure-to-pay processes.
When we explored the payments figures further, we noticed an encouraging trend. The use of electronic rather than manual invoicing systems helps businesses pay their suppliers faster. Of course, it does. Removing paper from the payables process reduces errors and increases control, thereby affording companies the opportunity to pay on time.
We found that 174 of the 587 businesses that have reported so far offer e-invoicing to their suppliers and the average time to pay for e-invoicing users is 41.7 days, four days faster than non-users (45.9 days). Also, e-invoicing users are more likely to pay their suppliers within the agreed terms – 71 percent meet the terms, compared to 69 percent of non-users.
The government guidance for businesses on e-invoicing concludes that: “Invoice document management systems software allows documents to be electronically exchanged, and means a more streamlined process with less manual intervention. This can make the process of payment faster for the supplier.”
This confirms Tungsten Network’s raison d’être and is backed up by our own industry research. A few months ago we surveyed numerous businesses about the causes of late payments and found that in most cases it is slow internal processes and a lack of automation that represent the biggest challenges for businesses when it comes to paying their suppliers on time.
The companies that opt to make use of technology to streamline and digitise intensive manual processes not only reap the rewards themselves but for those they work with up and down the supply chain. Late payment really can be a thing of the past.
Philip Hammond is welcome to ask for more evidence about late payment, but we believe there is already enough information out there to act. Reports, research and regulations all have their place, but companies need to take seriously their responsibility to pay on time and understand the benefits of responsible supply chain management, both for them and their suppliers. By using technology, which is readily available, to streamline the payment process, these companies can remove the friction that comes with late payments. Digital automation technology has the potential not only to directly address the problem but to strengthen the network of buyers and suppliers whose hard work and success keeps the UK economy moving.
Richard Hurwitz, CEO of Tungsten Network