Help your clients avoid poor payment practices by larger customers

Best practice helps employer and supplier, says Small Business Commissioner, Liz Barclay

Poor payment continues to blight small businesses. If anything, it has become worse in the pandemic.

Small firms often feel they have to accept poor payment terms and other unfair contractual conditions because if they push back, the bigger, more powerful customer will just go elsewhere.

They also worry that if they chase too aggressively for late payment, they will lose future work:

• 15% of firms owed money don’t chase up unpaid invoices; and
• 28% of tradespeople lose £1,000 a year because they don’t chase up payments.

Last year, the Office of the Small Business Commissioner surveyed small firms to see how well they were treated by their customers. Their responses showed three things happening:

1. payment terms are imposed on them
2. small businesses have no choice but to accept if they want to get the work,
3. employer firms may claim to be fair and ethical but often aren’t in practice.

The OSBC was set up to change the “culture of poor payment practice” in the UK. As accountants and finance professionals, AAT members are ideally placed to help us do this.

Having been Commissioner for nine months, I’m not sure that the problem is entirely the fault of larger customers.

Sometimes suppliers lack negotiating skills. They may just accept what’s offered without checking the details and don’t have good invoicing and cash flow management processes.

Accountants can have an impact

Accountants can be a huge force for good by helping small business clients adopt good practices.

As trusted advisers, you can deliver tough messages. Many practices, in particular AAT licensed members,  will be small businesses in their own right and have experienced payment abuse themselves.

Research in 2019 showed that 42% of invoices submitted by small suppliers had errors on them. Invoices with mistakes lie in the in-tray gathering dust until the supplier calls to find out why they have not been paid. That call is likely to lead to the invoice having to be submitted again and the clock starting to count down to payment all over again.

Instil best practice

Helping your small clients to get their processes for invoicing and cash flow management in place right from the beginning is one of the greatest services you can deliver.

On the other hand, small firms and freelancers often work for several customers and have to adapt to different payment processes. Encouraging your bigger clients to provide all of that information to each new business or freelancer they decide to work with makes life easier for everyone.

Often the person who gives your client the work has nothing to do with the payments. The person who pays knows nothing about your client, and will pay according to the firm’s standard payment terms. They may well have no experience of how a small business manages cash flow. I’ve been told by accounts payable people that it never occurred to them that a £300 invoice from a small supplier could be urgent given the amount is so small. They’re thinking about figures and processes, not people.

In my last column, I explained how inductions packs can make cut invoicing effors and save time and hassle for both sides. You can read it here.

ESG reporting

Payment practices could become part of ESG measurements. Large firms should already be reporting your payment performances to the Government. If you bid for public sector contracts, you will be expected to pay your suppliers within 30 days. Construction firms are expected to sign up to the Prompt Payment Code if they are bidding for public sector contracts.

It’s a short step from there to Boards and audit committees being expected to ensure their suppliers are paying fast and fairly. Accountants will be vital in relaying messages and helping make sure the business payment departments of their clients have the right processes in place and are auditing those processes.

Please encourage the companies you work with to consider the following.

• Negotiate fair and fast payment terms before the work begins.
• If suppliers have to pay out for labour or materials in advance, agree up-front or staged payments to cover those costs are likely to benefit everybody.
• Put everything in writing and ensure all parties have copies to avoid lost time and disputes.
• Ask for and give explanations: what does ‘standard terms’ mean? Small suppliers may erroneously assume it means 30 days. If it means 90 days they need to know. 
• Ask for details or provide details of everything that needs to be included on invoices.
• If your client needs a purchase order number on the invoice make sure your supplier knows how and when to get it.
• Make sure everyone knows when the invoice should be submitted, to whom and when the money will hit the bank account.

Suppliers and customers should have named contacts so that the supplier can check they’ve given all the necessary information, and the customer can check with the supplier if there’s some detail missing rather than just leaving payments to fate.  

Form good relationships with the person who pays the supplier and make sure payments can be made fast. It’s a reputational issue and may become an audit one.  

If payments are late or unfair we can help the small supplier. However, if we find poor payment practices or late payments we may be able to publish reports about those poor practices. Those reports are eagerly awaited by the press. Do the right thing and #PayDontDelay. Everyone benefits when payments are fast and fair.  

Liz Barclay Liz was appointed the role of Small Business Commissioner in July 2021 to spearhead the national effort to crackdown on poor payment practices which cause thousands of small businesses to close every year..