Small Business commissioner Philip King calls on businesses to back the tighter Prompt Payment Code
Prompt payment has always been vital to businesses’ health, but in times of uncertainty, such as the one we are all currently living through, it is more so than ever.
Major events, such as a global pandemic, put great strain on businesses, so ensuring cash flow is in a healthy state becomes crucial to their prospects of survival.
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For those due to receive payments, getting cash in for the goods or work provided in a timely manner could be the difference between surviving and folding. For payers, it is about meeting your obligations and keeping suppliers not only onside, but happy. Doing so both ensures your business’ cash flow is in a healthy place and prevents what outgoing interim small business commissioner Philip King describes as a “degenerative process” towards insolvency. In recognition of this, rather than relax the Prompt Payment Code’s requirements during the pandemic, as some might expect, King and his team have worked on tightening them.
There has, thus far, been more carrot than stick, with “constructive collaborative conversations, rather than naming and shaming people”. From July, though, the requirements placed on signatories to the Prompt Payment Code will become far tighter, as both the government and the Office of the Small Business Commissioner seek to improve the picture for businesses across the UK, particularly as the economy recovers from the pandemic.
King, who has overseen the Prompt Payment Code since its inception in 2009, is keen to emphasise two things: The code is becoming stricter and that the Office of the Small Business Commissioner is there to help businesses.
On the first point, the new requirements of the code have been put in place to give the voluntary code more “gravitas and credibility”, King says. Those requirements, which come in from July, are that 95% of payments are made within 30 days, and that business owners, chief executives or finance directors make a personal commitment to ensure payments are made on time.
“It’s a commitment by businesses to do something, not a legal requirement, and it is intended to shift culture over time,” he tells AT.
“If a business is going to commit to this, it has to do it seriously and it has to come from the top. Getting the chief executive, or the finance director, or the business owner to submit the request gives more gravitas and credibility.”
King firmly believes those commitments made by senior people will spillover throughout their businesses.
“If I was a small business and a large business signatory wasn’t paying me, I would be asking the purchase ledger clerk: ‘Do you know that you’re a signatory of the code? Do you know that your chief executive signed it and do you know that you’re currently in breach?’”.
“That’s a pretty good way of getting its attention. I always advise small businesses to use it in that way. If I’m the chief executive [of a business signed up to the Prompt Payment Code] and I find out my business is not adhering to it, I’m not going to be pleased. Therefore, it does create motivation further down for people to do the right thing.”
Businesses that breach the code and fail to meet the requirements are struck off the register and it goes on the public record. Businesses struck off can be readmitted after undertaking steps to ensure they meet the requirements.
“A big step change for us was when payment practice reporting was introduced because that meant that we could then look and see whether a business was compliant using their own data, because they submit it,” King says. “From January 2019 through to January 2020, we suspended a lot of businesses on the basis that they were reporting numbers that suggested they weren’t compliant. As a result, most of those are back on having worked through action plans to improve.”
The second message King is keen to convey to businesses is that the Office of the Small Business Commissioner is not only there to help set standards, but to mediate and help as well.
“The Small Business Commissioner exists to support small businesses,” he explains. “Therefore, businesses should reach out to us if they’ve got a problem with payment or want advice on payment. Similarly, if a signatory isn’t behaving as they believe it should, we’re there to investigate that and look at it and talk to them. Very often, when we talk to the signatory, we find that it’s six of one and half a dozen, the other.
“When we intervene, we can resolve things quickly. Yes, it’s a code. Yes, it’s voluntary. Yes, it’s to change culture. Also, practically, it’s a tool for businesses to use to help get paid quickly.”
“Prompt payment is an articulation of the value a business places on its supply chain,” King says, adding that prompt payment, or lack of it, is often a barometer of a business’ wider health. He cites former high street stalwart Woolworths as a classic case, noting its suppliers saw their payments gradually shift by “a couple of days a month over a long period of time”.
“If you genuinely haven’t got enough cash, you have to eke it out. Businesses fail when they run out of cash. They can have low profitability and low turnover, but no cash means you can’t pay the suppliers, can’t pay the wages, can’t pay the rent. Before that happens, the likelihood is that payments will begin to get stretched.
“Businesses that pay suppliers on time will also treat them well in all sorts of other ways and usually employees pretty well too,” he notes. “It’s indicative of a set of values that the business has. There will be some that don’t feel they can achieve what we’re now asking them to achieve and they will have the right to withdraw from the code if they choose to.”
Calum Fuller Calum Fuller is editor of AT and 20 magazines. He's previously served as editor of Credit Strategy, assistant editor Accountancy and began his career at Accountancy Age..