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Gerry Donnelly considers the ‘national scandal’ of delayed and late payments to suppliers

Author: Gerry Donnelly
8 September 2011

Given the tough economic climate that we have weathered over the last few years, the saying that "Cash is King" has never been truer. Unfortunately, late payment of invoices continues to be a scourge for UK businesses and especially SMEs.  It is estimated that at any one time, SMEs are owed £27bn in late payments, and are being forced to wait up to 39 days longer than their stated payment terms. 

The blame is often laid at the feet of larger corporates, who pay according to their own terms, rather than the supplier's terms and conditions.  Indeed around a third of SMEs often cite this as the major strain on their cash flow. 

Undoubtedly, corporates do impose their size and influence and will often demand payment terms of 60 and 90 days. It is vitally important, therefore, that the supplier is aware from the outset what payment terms are going to be applied.  It is all too easy to accept a large order because of the impact on the top line, but if the terms do not allow you to pay your own suppliers on time, then you are storing up future problems.  

Late payment is not, however, purely down to the power of the corporates. In many cases, it is a reflection of inadequate financial information and poor credit control procedures. 

The knock on effect of late payment can be catastrophic, especially at the lower end of the food chain.  Some perfectly viable businesses, with good management, good products and sensible levels of debt may fail simply because they aren't paid on time.  There are, however, steps that can be taken to minimise the risk of failure. 

If cash is king, then why do so many businesses have a formal sales strategy but no formal cash management strategy? As a minimum, a successful business will be able to demonstrate the following: 

• Robust financial reporting and management information, prepared on a monthly basis. As well as a historic Balance Sheet and Profit and Loss Account, the management information should include forecast cash flows.
• Clearly defined and focused credit control policies.
• Funding facilities that are in line with the needs of the business. 

To complement standard monthly reporting, a rolling 13 week cash flow forecast should also be maintained.  This will allow management to have increased visibility into what is coming into the business against what needs to go out.  If used properly, this can give an early indication of any funding problems, and allow corrective action to be taken. 

Good credit control is also important, and this does not just mean chasing debt when it is past due.  It is about making sure that debt does not have to be chased.  To encourage this, all invoices should be accompanied by Terms and Conditions and explicitly state payment terms.  Calls should be made to customers before the due date, to confirm that all invoices have been processed and are free of disputes. 

If invoices remain unpaid, reminder calls and standard chasing letters may not be adequate. Where appropriate, customers should be put on stop and, as a last resort, legal proceedings should be initiated. 

High debtor days may also be indicative of a business that simply does not have the resource to dedicate to credit control, in which case factoring or invoice finance may offer a cost effective way of maximising cash flow.  As traditional overdraft lending has constricted, invoice finance has grown by 9% year on year.  While this type of lending does not suit all types of business, it should not be dismissed.  Cashflow is the lifeblood of business and is the main driving factor behind both growth and survival.  As such, anything that improves cash flow in today's business climate should be seriously considered.

If you or your client need to discuss cashflow issues or additional financial requirements, please contact Gerry Donnelly on 0121 710 1680.