Late payment is one of the biggest challenges facing small businesses today.
So, we welcome the government’s recent call to evidence to help create a more responsible payment culture.
The call for evidence will look at two issues: The first is how company boards can implement responsible payment practices throughout their supply chains. (The government has suggested giving a non-executive director specific responsibility for the company’s prompt payment).
The second proposal is how to best promote innovative technology, such as accounting software, to help small firms manage their payment process.
We will be taking part in this call to evidence, using our own insight based on the hundreds of thousands of small businesses that use our platform to help inform the debate.
What’s the issue?
Data from Small Business Insights, Xero’s monthly snapshot of the health of the small business economy, shows that invoices with 30-day payment terms are paid in 39 days on average.
The data also shows FTSE 350 companies pay in 46 days on average, or more than two weeks late.
That’s right. Bigger firms with deeper pockets pay more slowly.
In the days when invoices had to be physically passed between different departments, there might have been an excuse for this. But not anymore. This should be a discussion point for company boards. Is it appropriate that they are using their small suppliers as source of finance?
What’s the impact?
It is well known that late payments cause cash-flow squeeze, which contributes to some 50,000 small business failures each year, according to research from the Federation of Small Businesses.
But it is less well recognised that late payments can adversely affect a firm’s credit score, making it harder to raise funds. Small firms find accessing finance hard enough already without late payment issues making matters worse.
These issues go right to the heart of the productivity debate in the UK today.
Improving our national productivity means helping companies to get access to finance and addressing late payments which tie up working capital and stifle innovation.
What is the government proposing?
Over the years, central government has launched several initiatives to tackle late payments.
These initiatives include the 10-year-old Prompt Payment Code, a voluntary register under which firms agree to pay their small businesses suppliers within 60 days. More recently, the government created the office of the Small Business Commissioner, whose job it is to look at late payment complaints.
But the problem has not gone away.
Now the government is taking additional steps to create a more responsible payment culture.
This call for evidence follows an announcement last week by the business secretary Greg Clark in which he set out other new measures. These include the Small Business Commissioner joining the Prompt Payment Code’s compliance board and further updates to how the code is operated.
We support these new measures. But we would like to see the government go further.
We believe the time has come for large firms to be obligated to pay on time.
We’ll be submitting our response to the call for evidence and we encourage all those involved in this issue to do so too.
Tackling this issue is crucial to enabling small businesses to reach their full productive potential.