As the economic climate worsens, some bigger firms seem to have made a resolution, or used an excuse perhaps, to pay more slowly. We’ve seen examples of firms that previously paid their small suppliers in 30 days unilaterally changing payment terms across the board to 60 or even 90 days.
While bigger customers may delay payments to make the books look better temporarily, delaying opens up a hornet’s nest of knock-on impacts.
Smaller suppliers are facing gaps in their forecasted cashflow. They’re struggling to fill those gaps as credit tightens. The full range of finance options isn’t usually open to them. It’s often cheaper to use any available overdraft facility or max out the personal and business credit cards anyway.
Bills are going unpaid. For many there’s been nothing with which to pay themselves a salary. Fears and mental health problems are building. The cost-of-living crisis that reduced spending over the holidays (on which lots depend to survive for the rest of the year) is bringing many small businesses to their knees; some 50 shops a week are already closing. Across the sectors, vacancy numbers are falling, investment is on hold and redundancy notices will follow.
If you don’t pay your suppliers quickly, they won’t be there the next time you need them. It’s costly to find new ones and risky, too. They may not deliver, and you could lose your customers to your competition. Working in partnership with suppliers to get them and you through this cost-of-doing-business crisis will be a smart move.
The good news is that this particular penny is beginning to drop. Many bigger firms are spending huge amounts getting to know their suppliers, on stewardship and on updating payment practices. Boards are approving spend on new procurement and payment systems, and approval systems are being overhauled. It can take time and money to update processes to pay invoices quicker and improving payment behaviour is a leadership issue.
It’s more important now than ever to get money to smaller firms faster. They depend on income to pay wages and bills. They need certainty as to when the money will arrive in their bank account. Without that certainty there’s no investment in digital transformation, equipment, or additional people. For bigger customers, the benefits of paying quicker are less tangible but just as important: an enhanced reputation as a good payer; investors interested in ethical businesses; and good people wanting to work with you.
If you make your payment commitments public by signing up to the Prompt Payment Code, or you’re a large enough firm to log your payment performance via the reporting scheme to the Department for Business, Energy and Industrial Strategy, potential suppliers can choose to work with you rather than a slower-paying competitor.
Boards, non-executive directors and chairs should ask: how well do we treat our suppliers? Payment practices are a governance issue, not just an operational issue, for all the reasons already discussed. They are also a social issue.
Good firms pay quickly, and small suppliers, rooted firmly in their communities, provide jobs, donate to local ventures, understand the demographics and ethnic makeup and, therefore, the needs of local people. They do the levelling up. They need your support to achieve that. Without your payments coming in quickly they won’t reach net zero and if the UK’s 5.6 million small businesses don’t get there, the UK won’t reach its targets. That makes payment practices an ESG measure.
Recovery and success depend on your resolution to pay fast and fair. #PayDontDelay #EveryoneBenefits
Liz Barclay is the Small Business Commissioner
This article was taken from Issue 1, 2023 of The Treasurer magazine. For more great insights, members can log in to view the full issue. If you're not an ACT member, you can sign up for eAffiliate membership.