Time to turn to technology to fix the supplier payments problem

Slow supplier payments are a major problem for UK SMEs operating in the retail sector where retailers take 41 days to pay their suppliers.

Following the announcement last week that company boards would be held directly responsible for payment practices, David Tyler, former Chairman of Sainsbury’s, and a member of Previse’s Advisory Board, argues that if retailers do not make significant progress on improving supplier payments, they risk a harsher regulatory environment. He believes the answer lies in technology which can deliver a win/win for buyers and suppliers.

Slow supplier payments are a major problem for SMEs operating in the retail sector.

Research from Previse shows that on average, UK retailers take 41 days to pay their suppliers. When it comes to the smallest suppliers, it takes them 74 days to pay up. Those that need to be paid the fastest have to wait the longest.

This is having a troubling impact. Slow payments cause almost a quarter of UK insolvencies[1] and they directly force 50,000 SMEs out of business in the UK every year[2].

The Government is clamping down and recently suspended or removed 17 companies from the Prompt Payment Code, an initiative to speed up payments. This action received widespread media attention.

Retailers need to change their payment culture before it is too late.

Incoming regulation

The Government has made clear its intention to remove the difficulties that small business suffer from late payments.

It called for evidence in late 2018, asking to hear from firms with ideas for solving the problem. This was swiftly followed by action. It announced that slow paying firms will no longer be considered for major contracts and it wrote to 10,000 businesses, warning them they need to improve their payment practices.

Meanwhile, the Small Business Commissioner, Paul Uppal, has stepped up his campaign on late payments. He publicly named and shamed Holland and Barrett for its purposeful culture of payment practices, leading to some embarrassing headlines for the retailer. He also named and shamed 17 others – including Vodafone and Rolls Royce.

The reputational risk is clear and if retailers do not take action, the Government and other regulators will.

Challenges of speeding up payments

That said, it is not easy for retailers to change how they pay their thousands of suppliers. B2B payments are riddled with bureaucracy, paperwork and manual processes.

Many large retailers have turned to supply chain finance as a way to pay suppliers early, while improving working capital at the same time.

However, this only works for bigger suppliers.

Nearly half of all programmes only include a company’s largest 25[3] suppliers, leaving out the thousands of suppliers who actually need the support – the SMEs. This is because the programmes typically have burdensome on-boarding procedures and are technology intensive, making themeconomically unviable for either party.

Big firms are paid on time, while SMEs are left by the wayside, struggling with long payment terms and spending time and resources chasing payment.

Urgent response required

As the slow payments problem and its list of victims grows, so too does the likelihood of the introduction of onerous regulations from the Government and the Groceries Code Adjudicator.

To be ahead of this, retailers urgently need to address this but in an economically sustainable way. They need to move away from the ‘this is how things have always been done’ mindset, towards one which is open to change.

There are technology-based solutions already in the market which have strong support from SMEs and the Small Business Commissioner. These solutions use artificial intelligence to analyse data, enabling suppliers to be paid instantly. They are capable ofchecking millions of invoices in less time thanit takes a human being to make a cup of coffee.

By embracing them, retailers can ensure that none of their suppliers are paid late – and retailers can do this in a fully sustainable and economically advantageous way.

[1] AAT (2018) – https://www.financialdirector.co.uk/2019/01/17/the-late-payment-challenge/

[2] FSB (2016) https://www.fsb.org.uk/media-centre/press-releases/stop-late-payments-save-50-000-small-businesses

[3] PwC (2018) – https://www.pwc.com/gx/en/services/advisory/deals/business-recovery-restructuring/working-capital-opportunity.html

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