The prompt payment code was put into place to encourage speedier payment of small suppliers by some of the UK’s largest companies and prevent retrospective change to payment terms.
14th November 2013
The prompt payment code was put into place to encourage speedier payment of small suppliers by some of the UK’s largest companies and prevent retrospective change to payment terms. Signatories to the code have increased greatly over the past couple of years with around 1,500 firms agreeing to adhere to its parameters. However despite this apparent success, currently over £30 billion remains owed to UK businesses in late payment.
Looking a little closer reveals that many of the companies who have added their name to the register have not been the prompt-payment-paragons that membership would suggest. Nine of some of the most well known signatories have hit the headlines in the last year for poor payment practice. Transgressions include late payments, retrospectively extending payment terms to 90 or 120 days or changing contracts to demand settlement discounts for payment to terms.
Late payments have a ripple effect that spreads across the business ecosystem, impacting cash flow as each tries to mitigate the impact of delayed payments. Inevitably one late payment leads to another and small businesses, as those with the least financial ‘buffer’, are often those who suffer most.
Despite this, cash flow issues and prompt payment isn’t just an issue of the large ‘bullying’ the small. Supply chain liquidity is a problem at all levels and across all industries. However the solution isn’t as clear-cut as 30-day payments for all. Each business will have differing abilities to absorb the impact of late payment or incentivise early reparation and payment best practice will vary accordingly. There are many reasons why terms differ between industry sectors.
Philip King, Chief Executive of the Institute of Credit Management (ICM), says that while Late Payment remains the scourge of small businesses, recent debates and calls to punish those who transgress do little to create an informed solution: “Late Payment is a complicated issue,” he says, “and one that cannot be resolved by fines and arbitrary payment terms that fail to recognise that different business sectors operate in different ways.
“What businesses need above all else is the certainty of payment; they need to know that they will be paid within the terms agreed and that those terms will not be changed without prior discussion and consultation.”
Membership of the Prompt Payment Code ought to be more than lip service to the idea of sustainable payment practice. However there is a need for legislation to offer support for a more nuanced approach to payment best practice. . Businesses need to conduct themselves ethically and responsibly but this is never as simple as paying all of their suppliers within 30 days.
Instead of calling out the Prompt Payment Code for its failure focus needs to be placed on finding a way that allows both buyers and suppliers the flexibility and transparency they need to transact effectively. As businesses become ever more networked and interdependent the approach to governing their mutual financial success must also mature.
Services are evolving to support this more nuanced and sophisticated approach to B2B transactions. With the development of the Bank Payment Obligation, the introduction of services around invoice financing and indeed our own partnership with MasterCard, businesses have greater choice than ever before in optimising their own cash position.
In the face of this changing payments landscape it’s important that legislation, and the debate, reflects this transformation. This sets the scene for the prompt payment battle-ground to give way to peace talks.