Why going from Late Payment to Claimant is not always the answer

Tips on how reduce the instances / impact of late payment from your customers

Straw polls amongst networking groups, media coverage in the wake of the Carillion collapse and even the Chancellor of The Exchequer highlighting the “continuing scourge of late payments” in the Spring Statement delivered on 13 March 2018 mean the issue of customers paying their suppliers late is still a major ‘pain point’ for businesses today.

Prompt Payment Code

Small businesses, via the Federation of Small Businesses (“FSB”), and others are putting pressure on the government to address this problem and have been for some time. Arising from this, The Prompt Payment Code (“PPC”) was launched in 2008 and this, in effect, laid down a set of principles for businesses that commits them to paying suppliers fairly and on time. I use the word “fairly” because research undertaken by Siemens Financial Services last year revealed that businesses with a turnover of less than £1million were waiting an average of 72 days to be paid whilst those with a turnover of between £1million and £10million were being paid within 53-54 days.

The PPC was welcomed and continues to take on more signatories to the Code. However, having discovered that Carillion had been a signatory since 2013 has led to calls for the PPC to be made more robust, with even penalties being awarded against firms that have ‘signed up’ yet do not comply with the principles.

Payment Practices and Performance Reporting

In addition, a new statutory duty to report on supplier payment practices was introduced last year with the aim of boosting transparency for SMEs who provide goods and/or services to large companies and LLPs. The duty applies to all accounting years from 6 April 2017 and the businesses to which this applies have to provide information on their standard payment terms and their procedures with dealing with queries with suppliers, the average number of days they take to make payment and a breakdown by percentage of how many invoices they pay within 30 days, between 31 and 60 days and in excess of 60 days.

 

Failure to disclose this information could lead to companies being fined but, again, it all sounds well and good but with the first set of reports due to be available it would seem that a large number of businesses have failed to disclose this information. Even more alarming is that of those who have responded only 29% paid their suppliers within 30 days from the June to November 2017 period.

Therefore, what else can businesses do to try and protect themselves? The government will, I am sure, address these matters surrounding the recent initiatives described above but we cannot just sit around waiting. As alluded to in my header, firms do have the option to withdraw credit facilities from late-paying customers and even pursue their claim through the Courts. However, this should still be last resort as I believe we should take some responsibility in order to try and mitigate the instances and effects of late payment…

What can you do?

  1. You should review your credit control processes to see if there is anything you do (or don’t do) which could have an impact on your customers paying you on time:
  • Do you obtain the customer’s signature agreeing to your terms and conditions (including payment terms) before you start trading with them?
  • Do you send your invoices out within 24 hours of providing the goods or services?
  • Do you adopt pro-active techniques for collecting payment on time i.e. building relationships with your customers and calling them before payment is due to check they have received the invoice and that there are no problems?
  • Do you have a credit policy document in place which sets out your terms and conditions for supplying goods on credit, what the criteria is for granting credit to a customer, collections procedures and steps to follow for pursuing non-paying customers?
  1. Check the credit worthiness of your customers before commencing businesses and, at least, annually for existing customers.
  2. Request a personal guarantee from a director of a business customer or reduce their payment terms to 15 days for example, if you have any concerns about their financial health
  3. Try to build in an allowance in your quotation/price for businesses who you ‘allow’ to pay you late.
  4. Don’t be afraid to ask for payment of your invoices! You have carried out your part of the sales contract; now it is your customer’s turn to honour their part and pay you on time. You are not requesting anything extra so there should not be any delay in following up late payments.
  5. Exercise your right to charge late payment fees and compensation in accordance with current legislation. This does not mean you have to raise these charges but the clause often acts as a deterrent.
  6. Prepare regular cash flow forecasts to ensure you have contingency for managing late payments
  7. Negotiate payment terms with your suppliers (do not simply delay payment) to help manage time lags in receiving payments from customers

As the FSB research has already revealed, around 50,000 businesses fail each year owing to the effect on cash flow caused by late payment – don’t let your business be added to this statistic.

Kevin Artlett FCICM ACII

Pecunia (2016) Limited