The Prompt Payment Code is designed to give SMEs certainty over the behaviour of their larger customers – but is it working?
At the end of May 2018, the chair of the Federation of Small Businesses, Mike Cherry, called on all FTSE 100 companies to tackle the practice of late payments in an open letter to their chairs and chief executives. “Many large firms appear to be using the disparity of power in business relationships to squeeze their suppliers, delaying payments to improve their own cash flow,” he was quoted as saying, in the Financial Times. “This is supply chain bullying, pure and simple.”
Mr Cherry specifically mentioned the recently collapsed construction and facilities management giant Carillion, and outlined how the company’s actions prior to its failure – in the previous July the firm extended its payment terms to 120 days – highlighted the ineffectiveness of the Prompt Payment Code (PPC), of which Carillion had been a signatory since 2013.
The PPC is a government-backed code, which commits signatories to pay suppliers within a maximum of 60 days, and to work towards reducing this down to 30 days as standard, has 2,174 companies signed up. However, questions have arisen as to whether this initiative is really having any positive effect. The FSB reports that payment terms are in fact lengthening, with more than four-fifths of its 165,000 members reporting being paid late, which equates to nearly a third of all payments being late – the FSB figures are gloomy; they report that the average value of a late payment is £6,142, while around 50,000 UK companies fail each year through the impact of poor payment practices.
The depth of the problem is also illustrated by payment filings with the Department for Business, Industry & Industrial Strategy, which were highlighted in the press by the accountancy group UHY Hacker Young – companies that meet at least two of the criteria (£36m annual turnover, and £18m balance sheet, or 250 employees) must now report on how long it takes them to pay their suppliers. What UHY Hacker Young found, led them to the comment that this reporting policy has “yet to make any significant impact on the culture of late payment.”
And that is the crux of the matter – there is no quick and easy fix to an economy-wide culture. The FSB has been reported as believing the solution lies in toughening up the PPC, introducing a penalty system, and mandating that a non-executive Board Director should be put in charge of ensuring a responsible supply chain and ensuring best practice in payment times, but this is not something that will happen overnight.
Inroads have been made recently – or, at least, we have had the promise of inroads that will be made. At the beginning of October the government announced plans to strengthen the Prompt Payment Code. Greg Clark, Business Secretary, promised a “tough and transparent compliance regime” when he announce a number of measures that he explained will tackle the “unfair treatment of small businesses by companies who abused their position by paying late for products and services.”
In the meantime at least, however, the onus is unfortunately on suppliers to act to protect their businesses, choosing their customers with some care – for example, using the latest credit reports – and investing in credit insurance (perhaps with accompanying credit control services, and maybe invoice discounting or factoring too), to mitigate risk. We may not be able to immediately change the challenging economic climate, or the dynamic between large firms and SMEs, but it is possible to change the way that we respond to this challenge, and make savvy choices that offer peace of mind.
To find out more about our Credit Insurance and other risk mitigation solutions, and which might prove the best value for your business, please call Laura Prime on 01279 722555.