We will end poor payment practice and protect business, say FSB.
The Federation of Small Businesses (FSB) has published a comprehensive and much-welcomed report, outlining strategy to tackle the ongoing problem of late payment.
In recent years, the trend of late payment has sadly escalated to the point of destruction. Almost one in three invoices are now paid late, according to the FSB, with the average invoice amount totalling £6,142 – a considerable amount of money to go missing for a smaller firm.
“Small businesses have grown increasingly frustrated at the slow progress that has been made in addressing the scourge of poor payment practice. This is not just a commercial problem – it is also ethically wrong,” Martin McTague, FSB Policy Director, writes in his opening statement.
“Both for small businesses and the UK economy, this is unacceptable and needs to stop. At the moment, poor payment practice is not taken seriously enough in the boardrooms of larger companies, particularly with regard to corporate governance strategies. The Government has recently signaled its intention to introduce new reforms on corporate governance, targeted at the behaviour and conduct of large businesses.”
Sadly, 50,000 small businesses were wiped out as a result of late payment in 2014, according to the study. To ensure this doesn’t happen again, the FSB has pledged to rescue small businesses from the tide of late payment. But how did it get to this?
Why do big firms delay payment?
Aware of the consequences of late payment on their suppliers, big retailers and household supermarkets are among some of the worst offenders for this. Smaller firms, often overjoyed to have even received an order in the first instance, are forced to accept their customers’ payment terms, even if they’re far longer than the credit terms they offer other customers.
To compound matters, the bigger firms will not always adhere to these terms, often waiting up to 100 days to pay suppliers. The FSB research suggests that a shocking 61% of small businesses are paid late by bigger businesses. This supply chain bullying reflects a wider cultural trend, where payment terms are used to improve cash flow and the margins of larger businesses, at the expense of small suppliers, who are left with depleted and uncertain cash flow.
Why is cash flow so important for small firms?
As a small firm, when cash flow dries up there are few options available to continue running as normal. They will not be able to invest, grow or improve. Some may be lucky enough to bridge the gap using a lender, others may not have the same experience or credit reputation to do so. This may be easier for large firms as they have extensive and successful financial history, whereas a start-up would struggle to find an inexpensive solution – often resorting to cutting down services, selling assets or in some cases, shutting completely.
What is being done, and what can you do?
The FSB has provided a list of policy recommendations aiming to empower small firms, raising awareness of the seriousness of the issue and actively intervening in such activity. These include:
- Mandatory sign up for all FTSE 350 businesses to the Prompt Payment Code (PPC), encouraging large businesses to actively review treatment of their suppliers.
- Introduce a ‘3 strike’ regime – repeat offenders will be struck off the PPC and forced to demonstrate and evidence improved payment practice.
- Small Business Commissioner (SBC) given remit to impose ‘name and shame’ tactics on offenders – to provide impact across the community by highlighting bad practice. Praise will be awarded to those who set positive examples.
- Supply chain bullying to be specifically addressed by the SBC, managed in order to prevent business casualties.
- Supplier interests represented at executive board level – large companies required to report annually to shareholders on their payment practices.
- Payment information available to access through the Duty to Report – small businesses able to access and compare payment information before deciding whether to trade on credit terms with a customer.
The FSB estimates that, if small businesses had not been subject to late payments in 2016, profit growth for the year would have been £4.8 billion above actual.
This reflects higher turnover due to an opportunity of time and focus away from credit control, and reduced costs, such as overdrafts or loans. The significant economic benefits of these tactics, if implemented, would benefit thousands of people all over the country.
What do you think of the report? Let us know in the comments section below. You can read it in full here.
If you’re a small business owner, find out ways you can avoid late payment here.