No consumer can walk into MarsUK’s factory and try to buy chocolate with the offer of paying less than the full price on the spot, or 100 per cent of the price four months later. The factory security would eject you reasonably quickly. Yet that is what MarsUK is offering its supply chain, a new finance initiative, but coupled with a doubling of its payment terms to 120 days. It isn’t fair. Lengthy payment terms and late payment is more often than not a useful cash flow tool for bigger businesses and even as we enter recovery, firms continue to act badly in this area.
In a recent survey conducted by the Forum of Private of Business, 23 per cent of members reported an increase in late payment over the past 12 months. 29 per cent had seen an increase in the average number of days beyond the deadline that a payment is made late and 19% have seen an increase in both elements of late payment.
The research indicated that as the economic situation has improved the number of businesses reporting late payment as a serious problem has remained static. However, with upwards of £30billion tied up in late payments, costing a typical small business 130 hours a year chasing invoices, small businesses are keen to see more measures to tackle the issue.
The government’s late payment consultation contains a number of suggested remedies, some non-regulatory whilst others part of the Small Business, Enterprise and Employment Bill, recently announced as part of the Government’s programme for the year ahead. Some draconian measures have been dropped but overall there are some positive steps forward in the efforts to tackle late payment, even if one critical obligation of government has not been met.
To boost prompt payment in the public sector the government announced that 30-day payment terms were to be passed down supply chains with public reports on late payments, together with greater powers to investigate complaints raised by the Cabinet Office’s ‘Mystery Shopper’ scheme. The ‘Mystery Shopper’ scheme is a highly valuable, if not well known, policy that allows anonymous feedback on government procurement practice, and greater powers for it should help drive higher usage.
In the area of incentivising fair, transparent, payment practice, the government intends to legislate to give force to a new reporting framework. The Forum of Private Business believes that major companies should face mandatory requirements to disclose their average payment terms and times. This is a strong metric for accountability to supply chains and shareholders. It is important that any such metrics are easily comparable and transparent in their meaning. With a hazy commitment to legislate ‘when Parliament permits’ it will require continued pressure to get this implemented in time for the shortened, 10 month, Parliamentary session.
On the Prompt Payment Code, much more thinking needs to be done. The government proposed an ‘upper tier’ creating two categories of signatory. With the potential devaluing of the commitment for those signed up to the lower tier, together with general confusion of having two categories, this idea has been shelved. Certainly, there remains very low usage of the challenge function within the Code, most recently used by the Forum of Private Business to challenge Marks and Spencer’s status, but more work has to be done to strengthen the monitoring of companies on it together with the sanctions that can be made if they fall foul of it.
On the length of payment terms, an issue frequently in the headlines, the government stepped back from introducing a maximum legal payment period, which could cause unintended consequences given the variance of contracts already in place. Nevertheless, this is a highly contentious area with a number of companies extending their payment terms but at the same time introducing a supply chain finance scheme.
However, one major issue remains unanswered in the government’s response. The Forum of Private Business asked for clarity over existing EU regulation that enables small businesses to challenge ‘grossly unfair’ payment practices whilst retaining their anonymity. The EU legislation places an obligation on governments of member states to put a mechanism in place to support this right, for instance by creating and supporting a forum to support representative bodies to challenge payment terms on behalf of members.
Maintaining anonymity should not be underestimated as a root cause for why many businesses do not use existing legislation to pursue late payments. Creating a system where that anonymity is protected is essential but it remains the one area the government is yet to tackle. As the various proposals in the government’s document start to trickle forward, getting this issue sorted will be at the forefront of our mind.