Not being able to collect cash fast enough is one of the most common reasons for businesses to shut down. Multiple case studies suggest that 80%-90% of companies fail due to cash flow.
At the beginning of 2021, official statistics revealed that £23.4bn worth of late payments were owed to companies across Britain. The Federation of Small Businesses (FSB) estimates this leads to around 50,000 businesses ceasing to trade each year.
Late payments are also damaging for larger companies procuring products and services from small suppliers, as their closure can disrupt their supply chains. This also leads to a drop in revenue by not being able to get products and services out to market.
In the current environment, businesses’ working capital is likely to be squeezed further due to increased costs relating to energy bills and payroll.
It’s encouraging that the UK government has undergone several initiatives to help address the late payments problem. However, these efforts are unlikely to solve the problem anytime soon, so businesses should protect their supply chains by implementing technological solutions to ensure suppliers are paid on time while effectively managing their own working capital positions.
Current Economic Environment
Present economic conditions are incredibly challenging due to a combination of headwinds. Energy costs are soaring, and supply chains are becoming disrupted due to increased costs and political turmoil related to the war in Ukraine.
Added pressure from the Government has increased payroll costs, with employers National Insurance (NI) rising by 1.25% to 13.8% and the National Living Wage going up from £8.01 to £9.50 per hour from April.
This creates cash flow issues for businesses due to eroding margins and supply chain disruption, resulting in suppliers getting paid slower and, in some instances, a drop in demand for the products and services of purchasing companies.
These new challenges are unlikely to be solved anytime soon. The Office of Budget Responsibility (OBR) believes that inflation could rise as high as 8.7% by the end of the year, and it’s predicted gas prices won’t drop because of volatile wholesale prices.
Craig Lowrey, Senior Consultant at energy analysts Cornwall Insight, says:
“If the Government does not want to see more businesses fail, higher product prices for consumers and reluctant economic impacts, it will need to start giving them more attention.”
Why Late Payments Are Bad for Business
Supply Chains
Failure to pay invoices on time creates the risk of key suppliers going out of business. This can result in supply chain delays if companies rely on a single supplier for sourcing components and make it harder to fulfill orders. In worst-case scenarios, companies can lose customers to competitors.
Culture
It’s hard to form strategic partnerships with suppliers if conversations rarely go beyond late payments being chased.
This limits the success of both parties due to being a barrier to planning deeper relationships, whereby customers and suppliers are equally invested in the long-term fortunes of each other.
Staff Morale
Being chased for late payments can damage staff morale. Employees bear the brunt of dealing with disgruntled suppliers.
This can take up significant time and leave employees feeling demotivated, leading to their productivity levels dropping. Ideally, this time could be spent on more value-adding tasks that help develop employees and move them up the career ladder.
The government initiatives to solve late payments
During the last few years, the Government has introduced a range of measures to try and solve the issue of late payments.
Small Business Commissioner (SBC)
The SBC post was set up in 2016 to tackle the issue of late payments in the private sector and covers the whole of the UK.
The holder of the role and office is tasked with providing advice and information to small businesses on disputes, unpaid invoices, and best practices related to payments.
To date, £8m has been recovered in unpaid invoices.
Prompt Payment Code (PPC)
The PPC is an overarching attempt to solve late payments by encouraging businesses to sign up to a code that requires them to pay their suppliers within 30 or 60 days.
Changes were made to the PPC in 2021, making finance directors and CEOs personally responsible for the companies signed up.
Businesses that fail to comply are kicked off or suspended. Last year five companies were removed from the PPC, including Diageo.
Around 3,000 companies have signed up to the code to date.
How to Use Tech to Ensure Suppliers Are Paid on Time
Due to the limited powers of the SBC and the voluntary nature of PPC, Government efforts alone won’t solve late payments. However, they have raised awareness of how pervasive late payments are.
It’s not uncommon for invoices to miss their due dates because of poor processes rather than businesses holding back cash to boost their working capital.
Many companies are still reliant on paper audit trails and use disconnected software packages. This requires finance employees to run downloads for payment runs, enter data manually (in some instances multiple times), and get approvals for POs and payments via email and, in some scenarios, in person.
Moving to automation-powered accounts payable software will streamline and speed up invoicing and payment processes so that suppliers are paid faster and on time.
Leading vendors automate approvals, data capture (through OCR) of invoices, and complete payment runs through a connected workflow, eliminating the need to import or type in data from accounting systems over to banking software.
Conclusion
Unfortunately, despite government interventions, late payments are a long-standing issue that cannot be solved overnight.
However, purchasing companies with sufficient cash balances can help lessen the problem by introducing automation-led accounting and payments tools.
This will speed up the payment of invoices, enhance relations with suppliers, and save admin time by reducing manual tasks and minimizing being chased after for late payments.
