Learn how effective the payment practices regulation is and whether or not positive change has been achieved over the past 2 years

In his book The Road Less Stupid, Keith J. Cunningham identifies that bad culture is a consequence of tolerant management. He could have used Her Majesty’s Government as a prime example in the UK with the culture of late payment.

This is evident with the lack of enforcement of the governments ‘Reporting on Payment Practices and Performance Regulation’ (PPR) reports, designed to hold large businesses accountable for how they treat their suppliers, resulting in fines for those that fail to report.

There has been a significant drop in the number of companies reporting their findings. It appears the Government tolerates this behaviour and does not use the punishment for a failure to report on time, enabled in the regulation. Just like a naughty child, large companies have found these boundaries and are exploiting them.

In this blog, we track the fall in compliance and consider whether those who have reported show any improvement in their payment practices.

Background

Each year, we examine the payment practices of large companies to see there are any trends in the late payment culture. A company needs to report if it exceeds any two of these three thresholds: £36 million annual turnover; £18 million balance sheet total; or 250 employees.

Reporting is six-monthly, one month after the end of each reporting period. In December 2017, 198 companies with November period ends reported in the first batch. By December 2018, only 102 of these companies continued to report, a decrease from the original batch.

At that time, we suggested that failure to report was one indicator of business problems. This view was supported by the behaviour of Patisserie Valerie who it was subsequently identified were totally unable to report because their accounts payables processes were so badly broken.

Only 18 of those 198 companies originally reporting in 2017 reported again in 2019.

How has compliance to report in PPR changed over two years?

Compliance has fallen off a cliff. Let’s face it, the reason why is because the Government tolerates it. Weak management results in poor culture.

There is no evidence that the fines included in the regulation (£5,000 per late company and ­­­£5,000 per individual director accompanied by a criminal conviction) have been utilised. In short, the government has bottled it!

Once in a blue moon public pressure plays a role

In April 2019, Holland and Barrett’s payment practices were scrutinized in the press, after they failed to pay a supplier on time. At that point, they had failed to publish their second and third PPR reports on time. Being in the news focussed their minds and they soon caught up. Those reports showed an improving trend from their first report displaying 60% of their invoices overdue, taking an average 68 days to pay.

Despite this improvement, the disclosure identified that Holland and Barrett’s payment practices were poor. If you were a new supplier to Holland and Barratt and knew their payment practices were bad, how would it shape how you negotiated with them?

What can we learn from those companies that managed to report?

How has the average time to pay changed over 5 reports?

The first takeaway is that many of these companies are taking longer to report.

Seven of these businesses reported their worst average time to pay on their fifth report, while ten of the 5th reports were higher than their company average. This demonstrates they are taking longer to pay their suppliers now than the prior two years, so something must have changed during this time to facilitate this.

Of these companies, you would prefer to work with company 11, a legal services business that only takes 11 days to pay, opposed to company 2, a pharmaceutical company who take 73 days to pay.

If you supply large companies, it is recommended to look up their PPR reports here to discover the payment practices you are likely to experience if you choose to do business with them.

In addition to the PPR reports, Market Finance analysed 100,000 invoices and found that late payments to SMEs almost doubled from 12 days in 2018 to 23 days in 2019, representing a growing culture of poor payments.

There are a few reasons why businesses are taking longer to pay. They may be paying late on purpose, or they could be struggling to process invoices quickly due to a lack of visibility, efficiency or control over their processes.

So how can companies improve?

If purposefully paying suppliers late, a culture change is required to reduce the time taken.

If struggling with processes, there is an easy fix for businesses: accounts payable automation.

Automation allows you to process invoices more efficiently, resulting in more timely payments. This should not be at the expense of control, as the invoices should be authorised by the correct employees and follow established procedures.

These systems automatically capture data from an invoice, route it to the correct staff members for coding and approval, and then post the data into the ERP system.

Automation prevents invoices from being misplaced during processing as the system will capture each invoice from scanned or saved documents, or from email inboxes. It also consistently controls who needs to review and approve an invoice, completing the process quicker.

The late payment culture is here to stay unless the Government gets its act into gear. Measures like PPR require enforcement and the Government is just a talking shop if the penalties built into regulations are not enforced.

This does not mean there is no risk to companies who ignore the reporting requirements as Holland and Barrett found, the court of public opinion can be brutal. The PPR reports can be useful if the company you are thinking of doing business files timely reports. If they don’t, ensure you seek other assurances on their payment practices.