Businesses across the UK are owed £30bn in late payments, with the average firm £31,000 short. With the economy set for growth and order books picking up, now is the time working capital can become stretched. So it’s time to act.
Before plunging in, it’s important to be clear on the problem in order to prescribe the right solutions.
Late payment, as opposed to the payment terms set between customer and supplier, goes beyond what is contractually agreed. It is unacceptable and should be stamped out. So what can be done?
To bring about lasting change, the CBI’s view is that we need to change business behaviour and create a culture of prompt payment. Paying late needs to become the business equivalent of having a drink before getting behind the wheel.
Shining a light on issues is the best way to change behaviour, so we think transparency has a big role to play.
We’d like to see voluntary disclosure of supplier payment policies, on a “comply or explain” basis.
A culture of prompt payment could be further encouraged by setting a “target” maximum payment term, again with flexibility on a comply or explain basis, recognising that a one-size-fits-all approach won’t work and that more complex contracts will require different terms.
The prompt payment code could be turbo-charged by introducing an “upper tier” for companies who wish to sign up to even higher standards, for example by committing to more detailed reporting on payment performance or shorter “maximum” payment time targets.
Big companies could also do more to help SMEs in their supply chains. They should publish guidance on their websites stating what companies need to do to get paid quickly. And they could set up online finance platforms so suppliers can use these to streamline payment processes.
The government could help by setting out clear guidance around the legal term “grossly unfair” in contract law, so businesses have greater confidence when negotiating payment terms.
Given its significant purchasing power, the government should lead from the front in setting best practice. We agree that all public bodies should report on payment performance.
A few notes of caution. Supply chains should be collaborative, not confrontational – so heavy-handed regulation won’t work. Suggestions such as mandatory maximum payment terms, introducing an enforcement agency or blacklisting of suppliers all fall into this category and should be rejected.
And, last of all, be mindful of unintended consequences. Business today is global. So don’t try and impose conditions on UK firms that can’t be enforced more widely. Otherwise contracts will simply be offered to overseas suppliers instead of UK firms.
With a big push for reshoring, that would be a real own goal.
How can businesses be encouraged to pay on time? Let us know by commenting below