Lower interest rates and a recent easing of inflation may suggest light at the end of what’s been a very long, dark tunnel for Britain’s Small and Medium Enterprises (SMEs), but late payments remain a major killer in the bedrock of our economy.
Research by the Smart Data Foundry says late payments cost SMEs £22,000 a year on average. The Federation of Small Businesses claims that the problem forces 50,000 business closures a year.
Recent weeks have seen the new government attempt to crack down on late payment with the launch of the Fair Payment Code. It aims to build on the Prompt Payment Code of 2008, which SMEs generally believe has achieved very little, not even after its post-Covid update which urged a commitment to paying 95% of SME invoices within 30 days.
Maybe medals will help. The new code will award a gold rating to companies paying 95% of all suppliers within 30 days; silver for honouring those terms for SMEs but 60 days for other suppliers; and bronze for paying 95% of suppliers within 60 days. It doesn’t sound like much of a carrot for debtors to avoid the government’s stick, but the intention is to change long term behaviours and break the cycle once and for all.
For the time being, however, forget about the improved investment intentions of SMEs while the longer supply chain remains damaged. The liquidity problems in larger companies continue to trickle down, becoming existential liquidity problems in smaller ones. Businesses need cash just to breathe, let alone grow.
The beginning of the end is when they enter into a cycle of robbing Peter to pay Paul, too often in a miserable combination of late settlement with suppliers and non-payment of corporation tax and/or VAT. It’s a scenario seen as much among relatively established small companies as it is among sole traders. It usually ends badly for both, sometimes with personal insolvency or disqualification for directors.
While much may be beyond the control of managers, they must make sure they exercise as much grip as possible with cash owed:
- Review – or even begin using – up-to-date accounting software. Several user-friendly and inexpensive packages are available: Xero, Intuit QuickBooks, FreshBooks, Wave, Zoho, to name but a few.
- Tight contracts are crucial when work or goods are invoiced in arrears
- Make clear that interest will be charged on late payments and specify a level above base rate
- Establish a robust, stepped policy for eventual legal action
Suppliers to troubled companies must have the confidence to chase payment and enforce their terms, regardless of the perceived risk of upsetting a customer: if a business agreement is too fragile to able to discuss money indisputably owed, then it will invariably lead to a bad debt, at least in part.
For those businesses already facing the threat of extinction from poor cashflow, managers can’t afford to bury their heads in the sand: they MUST take action sooner rather than later to keep their businesses afloat and, in particular, stay on the right side of HMRC:
- Get on the front foot with tax. Engage and explore a time to pay arrangement. Being unresponsive only aggravates HMRC and hastens a winding up petition
- Look at extending credit terms. Revisit repayment profiles for loans and propose realistic, achievable amendments. A loan that remains serviced, albeit differently, is still profitable for a lender.
- Consider the moratorium framework to gain a short period of “breathing space” while pursuing a rescue or restructuring plan. During this legal moratorium no creditor action can be taken against a company without the Court’s permission.
All businesses facing severe cashflow pressures should seek professional advice on credit management, invoice discounting, overdraft planning, communicating with HMRC and contractual terms to minimise the impact of late payments.
This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.