What is the Prompt Payment Code and why should you care about it?

Approximately 50,000 businesses close each year due to late payments, according to research by the Federation of Small Businesses (FSB). This is threatening jobs and damaging the UK economy.

That’s why, over the last few years, the UK government has introduced many reforms to what’s known as the Prompt Payment Code. This initiative is designed to speed up cash flow, increase compliance, and stimulate business growth.

However, despite almost 3,000 companies signing the code, poor payment practices run rampant, with the average payments delayed well beyond the 60-day target that’s required for 95% of supplier invoices. 

There is a lack of organisation, and few companies know how to run an effective accounts payable audit. In 2021, £23.4 billion worth of late invoices were due to firms across Britain, clearly demonstrating that the problem of poor payment performance still largely exists.

In this article, we’ll look at a brief overview of what the prompt payment code (PPC) is and why it’s important, as well as how technology can lend a hand in facing the challenges of adhering to the PPC today.

What is the Prompt Payment Code?

The Prompt Payment Code, also referred to as PPC, is a voluntary code of practice for organisations that is administered by the Office of the Small Business Commissioner (OSBC) on behalf of BEIS (Department for Business, Energy & Industrial Strategy).

Announced by a press release in December 2008, the PPC sets the standards for payment practices between companies and their vendors. The code is designed to encourage day payment terms of 30 to 60 days, depending on the size of the supplier. The code was first introduced as a response to requests for change in the payment culture.

Since this action plan is entirely voluntary, UK businesses do not have to comply. That being said, to date, over 3,300 large businesses have signed up, including major retailers, banks, construction firms, public sector authorities, and a range of SMEs. It also includes government contracts and smaller businesses.

The ethos of the code involves these tasks signatories have promised to undertake:

• Pay suppliers on time, and within agreed terms.
• Give clear guidance on terms, dispute resolution, and prompt notification of late payment.
• Support good practices throughout the supply chain by encouraging the adoption of the code.

How do you comply with the Prompt Payment Code?

As of July 1st, 2021, complying with the Prompt Payment Code requires: 

• CEO, CFO, Finance Director, or owner must personally sign and take responsibility for payment practices.
• Signatories must produce an annual report and explain any delays.
• If a buyer cannot pay in an agreed-upon timeframe, they must contact suppliers to explain why.
• Signatory of the Prompt Payment Code must allow vendors to charge late payment interest on delayed invoices.

For more on compliance, visit the Prompt Payment Code website at gov.uk.

Why should you comply with the Prompt Payment Code?

There is a multitude of benefits when your supplier payments align with the PPC. By complying with the prompt payment code, companies demonstrate their commitment to paying suppliers on time and in full. This helps to build trust, save money, and strengthen working relationships.

Compliance with the PPC brings benefits like:

1. Reduced disputes: By tightening up payment procedures, a business has more undisputed invoices and maintains an ongoing positive relationship with vendors.
2. Preferential prices: Consistently paying invoices on time, or even early, can give you greater negotiation power when agreeing on contracts and pricing. It’s not uncommon for vendors to offer preferential rates to customers that aid their cash flow.
3. Improved reputation: A company that complies with the PPC is usually viewed as more trustworthy and reliable. Showcasing your PPC membership can enhance your reputation and increase the chances of winning new customers and vendors.
4. Legal compliance: Late payment can lead to legal disputes and damage supplier relationships. Compliance helps to avoid these issues and stay within the law.
5. Cost savings: Paying suppliers late can result in additional costs like collection fees, interest charges, or even legal fees. Paying on time saves money and streamlines your procurement and accounts payable functions.

Closely adhering to the Prompt Payment Code helps companies build stronger, trusting relationships with suppliers, reduces disputes, improves their reputation, and helps to save on costs.

Challenges of complying with the Prompt Payment Code

Although the PPC is relatively straightforward in theory, complying with the standard can be challenging when put into practice. 

One issue is timing. When exactly does the PPC clock start ticking? Typically, suppliers view this window as starting the second the invoice is sent out. However, there are many reasons why the purchasing party might not see it the same way. For example:

• The invoice is lost in the post
• It was sent to the wrong email or landed in a spam folder
• The invoice has the wrong information
• It requires manual rekeying
• The payment method does not match what’s agreed upon
• The invoice has been processed but is waiting on the next manual payment run

All of these factors mean that the buyer ends up paying the invoice later than expected, and most likely, later than they intended to. 

Oftentimes, invoices must be returned to the supplier to make necessary changes. As a result, the clock continues to tick and does not restart, despite the lost time.

How the right technology helps you adhere to the Prompt Payment Code

The best technology will help a business automate accounts payable in all the right spots, streamlining supplier payments, and ensuring adherence to the PPC, every time. 

Accounts payable automation is simply the process of using software to streamline AP tasks like invoice processing, approval workflows, and supplier payments. It eliminates the need for manual intervention, which reduces the length of the invoice lifecycle and saves on costs.

The benefits of AP automation are limitless, but a few common advantages include:

• Self-service supplier portals to upload invoices and track payment status in real-time. This allows AP teams to focus more on business growth and less on answering inquiries for payment status.
• Optical Character Recognition (OCR) automatically scans invoices and inputs the data; machine learning (ML) then reduces errors.
• Intuitive approval system that can be customised, and accelerates the invoice approval process.
• Automated payments ensure payments are processed as soon as they are approved, eliminating delays caused by manually batching payments and uploading spreadsheets to various bank portals.
• Validation rules are built into the system to reduce payment errors, reduce manual intervention and pay suppliers faster.

AP automation also includes flexible payment methods, automated payment reminders, invoice tracking, and financial management features that can provide visibility into a company’s cash flow. 

Selecting the best accounts payable software provides a business with the tools they need to automate key processes and makes it easier to comply with the Prompt Payment Code.

Final Thoughts

The Prompt Payment Code is important because it’s about integrity. If you want to be seen as someone to do business with, you must hold up your end of the bargain. 

When a company is struck off of the PPC code for poor practice, it’s publicly announced by the Small Business Commissioner’s Office. A real-time record of signatories and struck-off organisations is maintained on the Prompt Payment Code and SBC websites.

The PPC is critical because it reduces disputes, enhances your reputation, creates compliance, saves on costs, and leads to stronger business relationships. Today, finance has more responsibilities than ever, and automation takes a little of the edge off.

AP automation software reduces the need for manual labour and helps keep an eye on the entire accounts payable operation. For current payment processes to be in total compliance with the PPC, you must future-proof your business with the right technology. To get started, check out The Ultimate Accounts Payable Survival Guide.