To say there’s a late payment “culture” in the UK is something of a misnomer, because the implication is that paying late is both intentional and endemic. And the reality is a little more complex, as I found out last week during a conversation with Philip King, Small Business Commissioner and former CEO of the CICM
Although the spotlight has shone more brightly on the consequences of paying suppliers late, of course it’s nothing new – so I asked Mr King why he thought it was something we’re still grappling with in the UK. And he pointed to a number of reasons, the first one being that it's something “we’ve always done” and that some companies consider pushing payment terms out as a normal part of their financial strategy (ok, so far, so cultural…).
However, he then went on to say that that was only part of the picture. In many cases it seems it simply comes down to error on the part of the supplier – ie an incorrect code used, filed incorrectly, invoice not raised on time etc, compounded by a slow discovery and response time from the purchaser.
Of course, paying late in these circumstances is something which could be prevented by a certain amount of education and the implementation of some best practice processes, but, I asked Mr King what to do about those companies who choose to do it. “Well, that’s certainly more challenging” Mr King agreed, “but the debate has moved on, and there’s more consensus about what’s reasonable.” Not only that, but he pointed out that reputational damage was very real, and that in a networked world, news travels fast. And he’s right. You only have to look at what happened with Tescos and Premier Foods, and the resulting damage to their share price and profits, partly as a result of their squeeze on suppliers.
But putting it simply, all business is at its heart a basic transaction – one party needs what the other is offering, and each wants to get a fair deal out of the arrangement. Mr King agreed, and said that unfortunately, when a smaller supplier is arranging terms with a much larger buyer, many feel intimidated, or unable to bargain hard on a deal that would suit them better. However, Mr King pointed out that this was actually their best opportunity to get what they want. Undoubtedly the buyer will have had to jump through several hoops to get to the buying stage, so the supplier should be less fearful, and make sure the arrangement is one that suits both parties.
I wondered if the Prompt Payment Code had done enough to help organisations in this respect. Mr King said that certainly more could be done, but added that the changes to the code in March this year have helped, with the addition of new tips and advice as well as templates for “where do I send invoices to?” and “who do I talk to?” for example. The changes also encourage better supply chain behaviour, making 30 days terms the norm, with a recommended maximum of 60 days. He went on to say that for many companies, it was more about adding certainty. If companies know when they’re getting paid, they can plan for it.
That being the case, I asked Mr King whether he thought efficiency enabling technology such as e-invoicing or dynamic discounting had a role to play in helping buyers and suppliers reach mutually beneficial terms. He pointed out that the benefit of improved processes or e-invoicing (apart from the obvious ones), are that because of the requirements, there’s less chance of error and poor behaviour. And then if you add dynamic discounting to the mix; it gives the supplier the opportunity to overcome any working capital crunch and get paid even faster, before terms. The important thing is to offer suppliers choice. Forcing suppliers to take a discount, or accept being paid in 200 days is not going to work, and not why the Prompt Payment Code was created.
Mr King pointed out that the situation should improve with the “Duty to Report” legislation, meaning that companies will be obliged to publish their payment terms and make any changes public.
With Helen Dickenson, Director General of the British Retail Consortium saying just this week that “consumers expect transparency and [that] trust is very important in a competitive environment”, I expect he’s right, and that even without the sharper teeth some are calling for from the Prompt Payment Code, companies simply can’t afford to risk damage to their brand and/or bottom line by supplier malpractice.