The Prime Minister has recently announced that large companies will be forced to prove what they are doing to stop slavery and trafficking in their supply chains. The new rules, which will apply to more than 12,000 firms with a turnover of £36m or more, will begin in October 2015. As part of the Modern Slavery Act, all large companies will be required to publish an annual statement setting out what steps they are taking to ensure that slave labour is not being used.
Few people would disagree with the sentiment here, but what about something a bit closer to home for a small business, like getting paid on time?
Regulation is one of those words which gets the hairs raised on many a business owner’s neck, but in this case is it justified and is it actually in the owner’s commercial interest?
The answer must depend on how difficult getting paid on time really is and what price comes with any regulation. According to the government’s recent consultation request:
“…in January 2015, BACS reported that 59% of UK small and medium-sized businesses were impacted negatively by late payments, with a total debt burden of £32.4 billion. The average small business was waiting for £31,901 of overdue payments. Their research also showed that the volume of late payments had had almost doubled since 2008. In part that was due to the general economic climate but there was also a wider cultural trend of large businesses using late payment as a means to improve cash flow. In June 2015, BACS’s most recent research showed that small and medium-sized businesses are still waiting for £26.8 billion of late payment debt…”
The government’s request goes on to cite:
“…The FSB survey of its members in 2014 revealed that 51% had experienced late payment within the previous 12 months. Figures from by the Institute of Directors (IoD) in December 2014 found that two-thirds of its small and medium-sized members were having problem getting timely payment of an invoice, with damaging knock-on effects: late payment by one business could push the problem farther down the supply chain, potentially affecting many more firms.
Although legislation imposing interest for late payment has been in place for some time, few businesses use it to tackle problems they are facing with other businesses. A recent private sector survey indicated only 10% have considered claiming interest under the late payment legislation despite 22% of businesses ending a relationship with a business customer because of continued late payment…”
Whatever the real numbers, it is clear that late payment behaviour is significantly reducing productivity across the economy at a time when the government is actively seeking to promote growth. It is surely reasonable that the promulgation of such adverse activity is penalised. Late payment effectively surcharges the economy and those that indulge in it to their own advantage should not expect to get off scott free at a cost to the SME and taxpayer.
If prompt payment of small business is to become part of business culture (as indeed the prompt payment of all employees is) then the Small Business Czar needs to have some teeth and needs to make some strategic changes to the way this is perceived. This could include the following:
- As with slavery in the supply chain, large companies should report in their company’s annual accounts what steps they have actually made to pay on time and additionally what payment terms they have actually achieved (eg, inter alia, days from date of invoice). The Commissioner should also make a report from these statements naming those who fall short of target. This would be a step forward on putting pressure for positive prompt payment behaviour.
- A mediation service run by the Commissioner is proposed . To be effective there should be a limitation on the ability of larger companies to go to the courts after the Commissioner has delivered its verdict/report from this service and small companies should have additional Commissioner support to reflect their financially restricted access to legal redress.
- A basic tenet of being fair and reasonable, irrespective of the contractual obligations and as an adjunct to the rules of unfair contracts, should be set that payments are to be made within 30 days of date of invoice.
Prompt payment occurs when organisations are held to account (as anyone in the telecoms industry being paid under BTs Significant Market Presence rules will testify).
Until larger organisations see additional costs and reputational risk if they don’t pay promptly, little is likely to change.