Tackling slow payments starts with the right data

Since the Carillon disaster last year, political pressure has been mounting on the large corporates and, in particular, the length of the payment terms offered to suppliers.

Since the Carillon disaster last year, political pressure has been mounting on the payment practices of large corporates and, in particular, the length of payment terms offered to suppliers. We welcome this focus. Slow payments can destroy small suppliers and are inefficient for buyers.

While much of the ultimate solution will come from businesses themselves, the Government can play an important role in enabling innovative solutions and encouraging businesses to prioritise tackling these problems.

However, good policymaking is hampered when there isn’t good data available to analyse the problem.

While the Government has taken steps to collect data through the Prompt Payment Code reporting, this is far from perfect and, in fact, can be actively misleading.

The Code data can often under-report the length of payment time; over-report the number of suppliers able to access early payment schemes, such as supply chain finance, and fails to give a sufficiently granular view of the payment landscape for SME suppliers.

Slower than you’d think

When we consider the payment lifecycle there are three stages which we need to take into account. Although there is variation with different buyers’ particular terms, broadly speaking the process works as follows.

Firstly, there is the time it takes to receive the invoice, for example, the PDF invoice landing in the payment department’s inbox, and being input into the buyer’s accounts system. In many cases, the terms don’t start until this point.

Step two is the payment term, which could be anywhere from 30 days to, in some extreme cases, 120 days plus. Usually, near the end of that payment term, the payment will be made, and the supplier will receive their money.

Frequently, however, an invoice will go overdue and be paid after that payment term. This is the third step: late payment. It involves significant stress, uncertainty and wasted time for the supplier which must now constantly chase up their buyer to secure payment.

What really matters to suppliers, however, is how long it takes to get paid in total. From sending the invoice to receiving the cash.

Unfortunately, the current published data only asks buyers to report on the length of payment terms and numbers of invoices overdue. This means that the time it takes to input invoices into the payment system – which can be quite substantial – is unaccounted for.

It also means that, not only is the payment situation likely much worse than official figures indicate but that it is not possible to accurately measure whether any progress is being made. In order to really understand whether policy options are helping businesses get paid faster, it is essential that we keep in mind the full payment lifecycle and properly understand the timeline from the supplier’s point of view.

Access to early invoice payment

While payments might actually be slower than the data suggests, it appears that the good news is that early payment solutions, such as supply chain finance in the form of reverse factoring, are widely available and offered by many of the large buyers.

The problem is that there is a big difference between early payment systems being offered and being taken up by suppliers. Especially among the small suppliers which need them most.

The reality is that traditional early payment solutions are out of reach for small suppliers.

The main reason for this is that on-boarding costs for these services are high. They require a business to take on a substantial investment in new technology and systems in order to be able to plug into the buyer’s system and access the early payment programme. While large suppliers with multi-million-pound contracts can stomach these costs, smaller suppliers with lower value contracts can’t justify the set-up expense.

When we consider too that these systems are not designed on a standardised basis, a supplier would be faced with investing thousands of pounds in multiple systems in an effort to gain marginal decreases in payment times. It simply isn’t realistic for most smaller suppliers.

Therefore, in understanding whether these systems are delivering benefits to the suppliers which are most in need of assistance, we need to look, not at how many buyers are offering the services, but at take-up among suppliers – especially smaller suppliers.

Getting below the headlines

Finally, in order to gain a true picture of what is going on with payment terms, we need go below the headline figures and examine how the experience of being paid differs for different sizes of suppliers.

The current payment reporting data asks buyers to report payment times across all transactions with no distinction made between how smaller firms and big businesses are paid. Each invoice to each supplier is treated the same by the data, multinational firms and small family business alike.

However, Previse’s own data analysis shows that, when it comes to payment times, size matters a great deal. Ironically, given that they are best placed to weather a more variable cash-flow situation, the largest suppliers are often paid first by buyers. The smallest suppliers, those which are least likely to have large reserves and will find it hardest to raise cost-effective short-term credit, have to wait for the longest to be paid.

This is perhaps unsurprising. Larger suppliers are likely to have a stronger bargaining position as their contracts are often more valuable to the buyers. Therefore, they are in a better position to negotiate shorter terms and get paid promptly.

However, they are also the suppliers which need the least help. No supplier should be paid late, but the smallest suppliers will find it the most devastating.

In order to make truly effective policy decisions around the issue of slow payment, we need to recognise that all suppliers are not treated alike and ensure that any proposed solutions are focused on helping the smallest suppliers. Therefore, policymakers must look at ways to monitor the payment situation specifically for smaller suppliers.

The problem of slow payments will be solved and it will be solved by innovative companies using technology and data to deliver commercially viable solutions. However, the Government can play an important role in speeding this process up. The first step will be looking at the data to understand what payments are really like for small suppliers today.

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