Small and medium-sized businesses are an integral part of the UK economy, making up 47 per cent of all private sector turnover, but poor accounts payable practices by bigger businesses and the increase of late payments are putting this essential ecosystem at risk.
The UK economy would be boosted by as much as £2.5 billion if small businesses were paid on time, according to the Federation of Small Businesses, while insolvency trade body R3 says that late payment is a major factor in one in five corporate insolvencies.
In fact, it is thought that small businesses in the UK are owed as much as £44.6 billion in late payments, according to research by insurance company Zurich.
In reaction to this, the government has introduced new stricter reporting requirements for large companies, making it a criminal offence to report late or in a misleading way when it comes to payment practices.
The first of these new six monthly reports were due on November 30th, for companies with a April 30th year end. After analysing the responses of the 201 companies that have reported to date, we have found that these businesses have on average:
- Paid supplier invoices in 39 days, the lower quartile take an average of 55 days to pay
- Paid 27 per cent of supplier invoices late, the lower quartile averaged 63 per cent late
- Offered standard supplier terms of 27 days, the lower quartile offered 55 days
- Offered longest standard terms of 73 days, the lower quartile offered 124 days.
More staggering is the range on late payments, with the best performing companies reporting no late payments, while the worst payers reported that 95 per cent of supplier invoices were not paid on time.
Contractual terms can be more even arduous with the average being 77 days and the lower quartile offering 148 days.
A problem for small businesses with limited financial controls
All of this is a problem within itself, but it is particularly problematic for those small businesses with poor, little, or no financial controls or monitoring processes, which can easily find themselves buried in paperwork and struggling to keep track of late payments.
For any business, the availability of cash is all about working capital management and a key element of this is getting customers to pay on time, or keeping track of unpaid invoices when they don’t.
All of this relies on back office processes that allow businesses to gain control of billing processes.
To give you an example of how late payments can lead to costs racking up for a smaller business, if a company turns over £1.2 million a year and sales are an even £100,000 per month, with 30-day payment terms, if everyone pays in 30 days a business needs to invest £100,000 in working capital.
However, if customers pay 15 days late – 45 days from invoice – the business needs another £50,000 of investment. That’s an extra 50 per cent investment in capital for a delay of just 15 days.
Businesses are at serious risk if they combine poor billing practices with weak accounts payable processes. Customer payment terms do not start until the customer is invoiced, so a delay in invoicing will further increase working capital requirements. Where supplier invoice processing is poor there is often a lack of visibility of future supplier payment requirements.
The perfect storm of a significant supplier payment demand arriving, while a business is short of cash waiting for customer money to come in, can lead to a business being put into administration.
The consequences of being out of control and struggling to process supplier invoices before their due date are far more severe than just the disruption caused by the number of calls received from suppliers chasing payments. It is highly likely that accounts will be inaccurate, which can lead to poor decision making.
An efficient supplier invoice processing system which ensures that supplier invoices are processed in a timely manner are equally appropriate for larger and smaller businesses.
The solution for each may lay in introducing some automation into the accounts payable process. A wide range of automated accounts payable software is available to help different sizes of business. These start from, simple solutions based on electronic document management which digitise the process, through to end to end solutions that automatically capture invoices and workflow them through to the ledgers.
Ensuring that accounts payable processes are working effectively is an essential element of ensuring the UK’s vital SME community continues to thrive and larger businesses which insist on a culture of late payments, may want to consider what will happen if those smaller businesses one day don’t exist.
Ian Smith is finance director and general manager of Invu.