Time to get tough on late payment

With UK businesses still struggling against multiple headwinds, addressing late payment could help many survive.

For smaller firms in particular, getting paid on time is perhaps the single most important factor in
maintaining a healthy cash position. If cash is the oxygen supply that keeps a business alive, then
paying late effectively chokes smaller suppliers, endangering their survival.

Worrying trends

Late payment to smaller firms is a stubbornly difficult problem to fix. Unfortunately, the problem is getting worse. According to Xero’s Small Business Index, based on anonymised and aggregated data from hundreds of thousands of small businesses, “In the UK invoices are paid significantly later (8.2 days) than they are in Australia (6.5 days) and New Zealand (6.2 days).” SMEs are still sometimes forced to accept 60, 90 or even 120 day terms from their larger customers.

The Office of the Small Business Commissioner’s (OSBC) own figures underline the scale of the issue: a third of payments to small businesses are late, with the average value of each payment is £6,142. It says 20% of small businesses have run in to cash flow problems due to late payments, and says that if small businesses were paid on time, “This could boost the economy by an estimated £2.5 billion annually.”

“It’s not uncommon for companies to use extended payment terms as a method of increasing working capital,” says Andrew Dunn, Director at Valley Accountancy in Whitley Bay, who kick started his accountancy career by studying with AAT and is now a full member. “I have seen more than a few companies go out of business due to desperately trying to work with large organisations, who demand payment terms increasing from 30 days up to 120 on a take it or leave it basis.”

The result is stark: businesses struggling to stay afloat as cash flows dry up. The stats back that up: the Centre for Economics and Business Research (CEBR) reported 6,700 business closures in Q2 2023 with an estimated 7,000 per quarter in 2024. And with a recession forecast due to high borrowing costs, the cost of living crisis etc is only going to make larger companies hang on to cash for longer.

Urgent help required

The accounting profession is on the front line. Andrew Dunn says much of his work centres on equipping clients with the necessary tools and procedures “We take them through what needs to be explicitly stated in contracts, we offer credit control services, debt collection templates and advise when sometimes, it is best to walk away from a large customer.”

Numerous guidelines and codes have been devised and introduced to tackle the problem. In the UK, the main tool is the Prompt Payment Code (PPC), which requires those businesses that are signatories to it, to pay 95% of invoices from businesses with fewer than 50 employees within 30 days, amongst other measures. Currently the PPC is voluntary.

The Code is overseen by the OSBC, which promotes best practice in payment to SMEs and lobbies. The OSBC was designed as an advocate for the SME sector, but its statutory powers are limited.

As result, UK SMEs remain vulnerable to late payment. Clearly, action is needed.

Tackling the issue

Thankfully, the urgency has been recognised by MPs, who have indicated a desire to increase enforcement around late payment. The most recent survey conducted by YouGov on behalf of two of the UK’s largest accountancy bodies – the Association of Accounting Technicians (AAT) and the Association of Chartered Certified Accountants (ACCA) – showed that nearly two-thirds (65%) of MPs think the Prompt Payment Code (PPC) should be made compulsory for organisations with over 250 employees.

The second lever that MPs are considering pulling is to hand more powers to the Small Business Commissioner. The survey revealed that over half (54%) of MPs agreed that the OSBC should be able to impose financial penalties for persistent non-compliance with the PPC.

It should be said that separate data from the Federation of Small Businesses (FSB) revealed the majority of small businesses experienced a late payment in 2022 – leading to 40% of SMEs applying for credit to manage their cash flow. This comes at a time when the government is assessing the responses to its Statutory Review of the OSBC’s effectiveness.

There are limits to every initiative, but if so many legislators recognise the urgency of the issue, then surely giving more power to those invested in helping SMEs must be part of the solution. As accountants in business and in practice, we are at the sharp end of this issue, so it’s important that as a profession we speak with one voice in our support of greater support for small businesses.

Adam Harper is AAT's Director of Professional Standards & Policy..