Companies which impose excessively long payment terms, fail to pay suppliers on time – or combine both of these poor practices – are about to be ‘named and shamed’ by the government in an attempt to change this kind of damaging behaviour.
A new website, set up by the government will require the first set of companies – those with April 30 year ends, and that meet certain criteria – to report by November 30, 2017. This new legislation contains enforcement measures to back up the reporting requirement a failure to report or to report accurately is a criminal offence.
So, are the businesses which need to report by the end of the month actually ready for this new system?
Not a new problem…
Late payments are nothing new.
Reports as far back as 2011 have stated that smaller vendors, have been forced to wait for payments, with some reports claiming these businesses are owed as much as £33.6bn in late payments, according to payment company Bacs.
The worst offenders for paying late were large businesses, which were responsible for 48% of late payments to SMEs.
The Institute of Directors (IoD) has also raised concerns about the impact of late payments after a survey of 925 small and medium sized businesses found that 615 were affected by larger customers not paying their invoices on time.
Earlier this year, research from insurance company Zurich highlighted that more than half of Britain’s SMEs were owed an estimated £44.6bn in late payments – a rise of £10bn when compared to 2011’s figure. That’s an enormous amount of money and quite an increase over six years.
The research shows that, on average, one in five (21% of the survey’s respondents) are owed more than £25,000 – and that almost one in ten (9%) are owed more than £100,000.
A novel solution to an old problem?
The government introduced new payment regulations and reporting guidelines in April designed to encourage businesses to pay their suppliers on time, and to mandate disclosure of supplier payment terms.
The problem of long payment terms and late payments are often confused because the end result is that the supplier has to wait a long time to be paid but they are, in fact, separate issues.
A customer requiring longer payment terms is not the same as paying late.
Late payment occurs when a customer pays its suppliers beyond the agreed terms. There is already legislation in place that allows a supplier to recover costs and charge interest at the statutory rate on late payments, but often larger companies are able to convince smaller suppliers to waive these rights or risk missing out on future business.
The government’s new reporting requirements are much stricter, making it a criminal offence to report late or in a misleading way, although it is telling that the legislative force is applied to the need to report properly rather than behave reasonably in the first place.
Getting on top of the requirements
It remains to be seen whether this reporting requirement will actually change company behaviour, and we will only find out after the first batch of public reports are made available.
However, there are two things that businesses need to ensure they have in place if they are to reduce the risk of falling foul of the new regulations.
The first is to dig out the payment data in time, and this in itself is not simple. The requirements are based on the volume of payments rather than the amount, and that could be tricky for those businesses which source their data from a finance system.
Those with a separate ‘procure to pay’ systems are likely to have more insight into the volume of invoices as well as dates and the audit trail of the payment process.
There is also the need to remain in control of the process, ensuring invoices are processed in a timely manner and are tracked by due date. Automation of the procure to pay process can be beneficial here enabling businesses to avoid the need to report late payments and the impact that may have on their brand.