Can late payment reforms save small firms from ruin?

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Holding larger companies accountable is a good start, but the PPC must be made mandatory to have an effect.

The Government is considering late payment reforms to ensure large firms pay their suppliers on time, protecting smaller businesses.

Late payments cause significant problems for suppliers and small businesses, from cash flow issues and associated additional costs, to spending time and resources on chasing payments. They’re a major factor in company insolvency.

Official government statistics show that over £23 billion in outstanding invoices is still owed to small businesses.

Similar late payment reforms were announced back in 2021 to help tackle this, which included strengthening the Prompt Payment Code (PPC) and reducing required payment period from 60 days to 30 days – but only for large businesses who sign up to PPC.

Two years on, and a new round of reforms are under consultation, which will end in April. Writing in the latest government consultation, Payment and Cashflow Review, Kevin Hollinrake MP, Minister for Enterprise, Markets and Small Business said the late payment problem ‘cannot entirely be addressed’ by legislation alone: culture change in payment practices is also needed.

Currently, signing up to the PPC is entirely voluntary and requires businesses to report on the proportion of payments made in 30 days or fewer, the proportion of payments made between 31 and 60 days and payments made in 61 days or more.

The new plans being considered include:

  • implementing mandatory reporting of payment disclosures of large firms which have already signed up to PPC
  • increasing accountability of CEOs and FDs to meet 30-day payment rule
  • extending the ‘sunset clause’ deadline for commercial debt repayment laws beyond April 2024 to provided continued protection for small businesses
  • investigating the possibility of technology and software ensuring faster payments
  • investigating how banks and lenders can help small businesses with cash flow issues.

So, do accountants think the proposed reforms go far enough?

Reforms will help once embedded within organisations – but careful monitoring will be needed

Todd Davison, Chartered Accountant and MD, Purbeck Personal Guarantee Insurance

We’ve had a number of customers who have faced financial difficulty as a result of late payments – particularly in the construction sector where they are sub-contracting or providing consultancy/engineering services to a main contractor.

Some clients have been dealing with late payments by accessing financing facilities such as invoice finance/factoring to help improve cash flow. There is an obvious financial cost in doing so, but it enables almost instant access to cash. Others are engaging with their supply chains to understand timings for payments and to determine if there are any larger/bigger contagion issues. Many of our clients are also undertaking careful financial planning/forecasting and stress testing to make sure the business has enough of a liquidity buffer to withstand late payments.

The reforms are therefore a good starting point and help raise awareness of the issues associated with late payments in the SME space. Making senior management more accountable is a good thing but it needs close monitoring for how effective it will be.

Overall, once the reforms become embedded with supply chains and cultures change, I am optimistic the reforms will have an impact.

Verdict: Small businesses have faced financial difficulty due to late payments. The reforms, once embedded, will help address the issue.

If PPC itself is not mandatory, there will be few incentives for larger firms to comply

Jamie Skelding, Director, Prime Accountants Group

Only 3,000 large companies have signed up to be part of the PPC so far. Of those, 95% of their payments need to adhere to the 30-day rule, leaving five percent unaccountable. It may sound small, but this can equate to significant financial hardship for small businesses.

So while the new reforms seem good in principle, by not making PPC mandatory, companies can continue to choose the 60-day payment deadline with few repercussions.

Cash flow is absolutely vital for small businesses, it’s the fuel in the tank that keeps them up and running. Currently, clients are managing late payments by deferring their own debts, further exacerbating the issue.

The reforms also look to be a ‘name and shame’ process for the non-compliant companies and this could be a great thing for accountability towards the CEOs and finance directors.

Yet from experience, initiatives such as these are slow to be policed, with no real guarantee to how long an investigation will take, should a company be providing late payments.

Verdict: Without making PPC mandatory, there is no incentive for companies to aim for a 30-day payment deadline.

Big companies need to understand the importance of prompt payment

Joanne Thorne, Technical Compliance Manager, SJD Accountancy

High inflation and the challenges caused by the cost of living have left many small businesses in a vulnerable position. Late payments are making things worse, often impacting cash flow and obstructing further growth.

Small businesses will be looking to take on as much work as possible at the moment. But they shouldn’t be forced to accept longer payment terms, which will impact their cash flow and could impact the future of their businesses.

Currently, small businesses are forced to chase up late payments, but many are considered too small to make significant waves or create issues in the future.

Signing up to the PPC has offered transparency around how promptly companies pay small businesses. However, the voluntary nature of the PPC means it does little to address slow payments by companies. It is still a helpful indicator of ethical companies that are committed to working with small businesses and paying on time, though.

The proposed reforms seem to be once again based around improving the visibility of companies’ status as prompt payers (or not). Ultimately, if a business doesn’t have the money to pay a supplier, the fact that they are part of a code is unlikely to have much impact, especially if the consequences of late payments are undefined or unclear.

For me, there is much to be done to ensure all companies understand the importance of prompt payments and also face some accountability and consequence for delaying payment without reasonable excuse.

Verdict: Big companies need to understand the importance of prompt payment, and face accountability and consequences for late payments.

Annie Makoff is a freelance journalist and editor.

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