As any entrepreneur will tell you, managing cashflow is critical to the success of their business and many have faced the serious challenge of meeting the payroll at the end of the month because there is not enough money in the bank account.
However, these aren’t badly managed businesses. In fact, most are profitable and owned by responsible owner-managers who are involved in developing products and services and who will often not pay themselves if there is no money available in their bank accounts.
And how do businesses find themselves in this situation? As research has shown time and time again, the primary reason for cashflow problems is late payment by customers, either in terms of not being paid by the due date on the invoice or because of unfair payment terms usually from large businesses.
As a result, it has been estimated by the Federation of Small Businesses that as many as 50,000 firms have to close their doors every year due to late payment and that the impact on the UK economy as a result is as much as £2.5 billion every year. In addition, a study carried out by the Centre for Economics and Business Research estimated that if the invoices of small businesses were settled on the day they were submitted, their revenues would increase by £40bn to £60bn per year.
The obvious remedy for this would be legislation to force companies to pay on time but that already exists in the shape of the Late Payment of Commercial Debts (Interest) Act which has been in operation for 24 years and allows creditors to charge interest at 8% over the base rate for late payment as well claiming compensation and reasonable costs of collecting the debt.
Yet despite this being in place for nearly a quarter of a century and the creation of a Small Business Commissioner to directly deal with this issue, a significant number of large businesses continue to be overdue in paying their suppliers which results in considerable problems when small firms are trying to manage their cashflow.
In fact, the most recent data from Xero - the global small business platform – shows that payments to UK small businesses were, on average, eight days late, and they were having to wait an average of 31 days to be paid by customers.
According to Xero, this represents the longest payment terms for two years at a time when companies are facing rising bills and the UK economy is in recession. In fact, it’s been estimated that such 55% of large organisations have admitted that they pay their suppliers later than the agreed payment terms.
This is despite more than three quarters of those responsible for payment within large firms admitting that they understand how this will have a detrimental effect on the smaller firms that supply them.
Other recent studies also examining late payment have estimated that the average wait is far higher at 37 days although this varies considerably across sectors. For example, whilst banks take an average of 20 days to pay suppliers, this is as high as 48 days for businesses in the household products sector.
And it can vary considerably within sectors and an examination of data by the Good Business Pays campaign showed that within the UK Food & Beverage Sector, a supplier to Sun Valley Foods will get paid, on average, within one day although firms will have to wait over four months for payment if they are supplying Coca-Cola.
This endemic culture of late payment within many large companies clearly needs to be dealt with and that is why many business owners will welcome the Payment and Cash Flow review recently announced by the UK Government.
Its aims are to scrutinise existing practices and measures, and the progress in combatting late payment, to ensure that the UK has the right arrangements in place to best support small businesses.
It will review what the current approach is by the UK Government, especially in reference to how late paying firms are being held to account - especially through the office of the Small Business Commissioner - and the impact of late payment on small firms.
Given this, it is important that owner-managers of small firms here in Wales put their views across on how late payment is affecting the ability of their business to trade effectively, especially during a recession.
More importantly, they should take this opportunity to put forward ways to improve the whole process of timely payments from large customers so that not only fewer businesses close because of such delays but that cash flows into these small firms enable them to maximise their contribution to the UK economy.
