Down the rabbit hole you’ve gone again, and when bandying words with the accounts personnel at the customer’s office, you feel like Alice in Wonderland trying to argue with the Queen of Hearts herself. Too often – perhaps when an invoice has remained unpaid – no one seems able to offer any logical or convincing explanation.
According to credit risk specialist Graydon, cashflow is the biggest internal concern for chief financial officers, citing a Robert Half poll where 61 per cent said slow-paying customers were the main problem – up from 26 per cent in 2011.
Four of the five largest UK industries – business services, construction, property/hotel and leisure – cut their payment periods during 2012, but the IT industry paid on average 0.74 days later, according to Experian.
"The rule is, jam tomorrow and jam yesterday, but never jam today," said the Queen.
"It must come some time to jam today," Alice objected.
"No it can't," said the Queen: "It's jam every other day. Today isn't any other day, you know."
New late payments legislation came into force on 16 March: will it make any difference? Or, like Alice, will you continue to struggle determinedly along a road beset with strange events, unlikely explanations, and characters you wish you hadn’t met?
Rob Downes, media spokesman for the Forum of Private Business (FPB), says late paying has become more common.
“Lending has dried up and cash is really tight. If you do not have the cash to pay a supplier, you pay when you can afford it,” he says.
“In the past this usually meant dipping into your overdraft or getting a bridging loan from the bank. Not any more – banks are calling in overdrafts or shrinking them, and you can forget about a loan if you have cashflow issues.”
What’s more, unlike for the Queen of Hearts, shouting “off with their heads!” and citing the new law is unlikely to help, he suggests. After all, UK legislation on charging interest so far has not generally had a big impact.
“If you take a business to court over slow payment, the likelihood of supplying them again is a distant prospect,” he warns. “Businesses are scared of losing custom – and probably rightly so.”
Downes says the Prompt Payment Code (PPC) could be tightened and government must take “more decisive” action – such as only awarding public sector contracts to firms that pay suppliers in 30 days. “We need to see a culture change where paying customers late is seen as a dirty practice like fly-tipping – something a business would not want to own up to,” he says.
According to FPB research, late payments are also causing many SMBs to delay payments to their suppliers as well. Seventy-seven per cent of businesses that said they had been paid late were themselves failing to pay their suppliers on time. It starts in the larger businesses, and can topple the entire supply chain like a house of cards, the FPB says.
The FPB believes a cultural attitude of late payment has developed in the UK – and that’s just crazy. The trend needs to be reversed quickly before more small businesses go under, Downes says.
"But I don't want to go among mad people," Alice remarked.
"Oh, you can't help that," said the Cat: "We're all mad here. I'm mad. You're mad."
"How do you know I'm mad?" said Alice.
"You must be," said the Cat, or you wouldn't have come here."
Eddie Pacey, managing director at EP Credit Management & Consultancy, says late payments have always been a problem, largely because too many businesses do not apply themselves correctly in agreeing terms, do not employ the right people to manage collection, do not give this area enough emphasis, and are often poorly run as a consequence.
He also doubts the new legislation will help. “The only good to come out of this is that people are talking about it – but government is not there to tell businesses how to conduct themselves. The legislation is there to offer recompense,” Pacey says.
Instead, to protect themselves, resellers should evaluate their business model, the expected profit, and what potential areas of concession they could make in extremis. They should also ensure they have skilled people to manage collections.
“Make absolutely sure the terms are agreed at the onset of trade. Above all, aim to spread your business and lessen dependence on one or two principal clients,” he says.
He claims the only possible route is to heavily financially penalise “bully boys” who either extend terms beyond 60 days or demand price cuts for paying earlier than this.
"Take some more tea," the March Hare said to Alice, very earnestly.
"I've had nothing yet," Alice replied in an offended tone, "so I can't take more."
"You mean you can't take less," said the Hatter: "It's very easy to take more than nothing."
"Nobody asked your opinion," said Alice.
If resellers are not firmer with their suppliers and buyers, they could very easily end up in rabbit stew, says Pacey.
He concludes: “Nothing else will work. Getting them to say in their financial statements how quickly they allegedly pay suppliers is not enough, nor is putting out league tables or lists. It’s also time suppliers fought their corner better.
“I recall bully-boy suppliers back in the early 70s, when I set out in credit management, crippling small businesses.
"Some of these were really big names in the movie world.”
Late payment law as of 16 March 2013
"Why, sometimes I've believed as many as six impossible things before breakfast."
Maximum terms 30 days, 60 days for public sector. Other periods only if not "grossly unfair". Default interest is eight per cent above the Bank of England base reference rate. Compensation may be levied.
Source: Wragge & Co
How to avoid or manage late payers
"Begin at the beginning," the King said, very gravely, "and go on till you come to the end: then stop."
*Complete, up-to-date credit application forms at sale and use credit checks and forums
*Verify customer details and send welcome letters outlining terms and overdue policy
*Identify late payers. Issue invoices as early as possible and communicate regularly
*Build relationships with personal visits and calls
*Don't wait if a bill does fall overdue, but follow up quickly.
Source: Experian: "A credit professional's checklist"
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