The Payment Practice Regulation (PPR) reports have been published since November 2017. The first reports were based on the performance of large companies for the six months to 31 October 2017. In May 2018 we saw reports from this first batch of companies for a second time, based on their performance for the six months to 31 April 2018.
This first batch of follow up reports shows these same companies have made no progress in reducing late payments since they first reported.
These results suggest the PPR, which was designed to ‘shine a spotlight on bad payment practice and lead to improved standards’, is not at all helping small or medium-sized businesses.
What do the PPR reports tell us?
The average number of supplier invoices being paid late (outside agreed terms) from all the companies that have reported since November is 31%.
Those who reported in the first month have had a better payment record than all the other companies reporting since, paying on average 26% of their invoices outside agreed terms.
However when they have reported a second time this figure worsened to 27%. This suggests PPR has had no positive impact on their payment practices.
This increase suggests either;
- They are using the late payment of suppliers as a means of financing their business and believe any consequences arising from the reporting requirements are less of a cost to them than the benefits of free financing
- They have inefficient purchasing and payables processing systems that they have not been able to improve during the reporting period.
These late payments have a real impact on SME’s
Late payments are still having a massive impact on smaller businesses, with Real Business reporting in January 2018 that the average SME is owed £63,881 in late payments, and 11% owed over £100,000.
This report goes on to identify that late payments bring “cash flow problems for 35% of small businesses, resulting in delayed payments to their suppliers for 29% of them and causing reduced profit performance for 24% of small businesses.”
Are large businesses addressing the issue?
Invu has recently (May 2018) commissioned a survey “Changing trends in the Accounts Payable & Purchase Order Processes of UK businesses” which followed a similar survey in 2016.
In this “Invu Survey”, respondents suggested their businesses were improving their payment practices with those reporting that their business did not always pay suppliers on time, dropping from 83% in 2016, to 64% of large businesses and 57% of medium-sized businesses in 2018.
The contradiction with the results of the PPR reports may suggest that, although the survey result shows there is an intent to pay on time, the PPR results show the capability to pay on time is limited.
This puts into focus the need to change the capability to pay and improve processing performance which is reliant on investment in the back office purchasing and accounts payables systems.
Regulatory drivers for change
Regulation can be a driver for change.
The cost of compliance alone can make a business case for investment.
The thesis behind PPR is that “naming and shaming” companies with poor payment practices will drive improvements in behaviour.
The initial results suggest this approach, which uses reputational collateral, is not working, or is at the very least a slow burner.
There is a school of thought that suggests legislation with real teeth is required to speed up change.
For example, Germany has implemented, according to Insider, strict “30-day payment deadlines, followed by 15 days when interest is due.” And then, “If, after those 45 days, there is still no payment, the matter is referred to the tax office who can take punitive action against the offending firm.”
Is there a win/win here for large business?
The “Invu Survey” also identified a catalogue of productivity and control issues that were both likely to contribute significantly to slow payment performance and poor control over the business as a whole.
The automation of Accounts Payable and/or Purchasing systems can address many of the issues raised in the Invu Survey and put a business in control of when it makes payments to it suppliers.
Companies may want to consider being proactive and investigating business improvement before legislation moves towards the German model.