Paying slow is no longer acceptable

In recent history, businesses have used extended payment terms with suppliers as their first port of call to improving their working capital. However, times have changed and this is no longer acceptable, socially, economically and politically. This is especially true when it comes to applying long terms on small suppliers. The good news is that for progressive companies, working capital can be optimised, without it being at the expense of SME suppliers, so that real win / wins are achievable.

Traditionally, large businesses have used the extension of payment terms and stretching of creditors as the key lever to improve or maintain working capital.

However, following high profile business failures which have had major repercussions for entire supply chains, times have changed and long payment terms are no longer acceptable socially, economically and politically.

Despite this climate, suppliers still have to wait on average 36 days from the date of invoice to receive payment from large buyers.

Large buyers can now use innovative, machine-learning based solutions to ensure that their suppliers, especially the smallest ones in the long tail, have the option of being paid instantly upon receipt of invoice.

High profile corporate failures and the need to assure liquidity within the economy have pushed late payments and long payment terms into the limelight. Undoubtedly late payment or the uncertainty of payment timing can cause significant impact on the stress levels of owners of small businesses. Large buyers, who have the resources to implement new technology and speed up payment processes, are now also taking responsibility in this equation.

Political action gathering momentum

Government officials are taking notice and have become increasingly vocal on the issue. In mid-April, the Small Business Commissioner, Paul Uppal, called out a number of companies over their purposeful culture of poor payment practices. He said the government was “determined to end the scourge of late payments and bring about a cultural change to deliver responsible payment practices”.

These strong words have been backed up by action and earlier this year it announced slow paying firms will no longer be considered for major contracts. It has also dropped some of the UK’s biggest companies from the Prompt Payment Code, an initiative to speed up payments, which received widespread media attention.

The reputational costs to business are clearly increasing. But the impacts on working capital also need to be managed carefully. One way to address this is through leveraging technology to suppliers paid faster, which is possible without any negative impact to working capital.

Re-evaluating the economics

The practice of imposing large payment terms on small suppliers is also economically inefficient. Long term, uncertainty of payment timelines means that larger organisations with lower cost of capital are being financed by smaller suppliers with much higher cost of capital. Somewhere these costs will have to be recovered. Some of that cost gets passed on and increases the price of their product or service, some also get absorbed.

While this restricts the ability of small companies to grow as balance sheets are under pressure, it can also represent a supply risk to the buyer. Especially in the world of ‘just-in-time’ supply chains.

While there is rightfully merit in calculating terms and price as part of the commercial calculus, a differentiated and carefully calibrated model should be adopted.

Under the current climate it’s time to start tackling the larger challenges in improving inventory and trade receivables, rather than looking for the easy out of paying late and the risk to reputation that comes with it.

For more information, please get in touch and download our 2018/19 Working Capital report.