business contracts Archives - K2 Business Partners

Late payment regulations need beefing up

In April this year I reported on the scepticism with which SMEs had greeted the appointment of a Small Business Commissioner to help SMEs to deal with larger businesses’ late and unfair payment practices.
Paul Uppal was appointed in December 2017 and ran his own small business for 20 years. In interviews since, he has reportedly said he hoped the problem can be solved by “cultural change rather than legislation”.
But in any case, Mr Uppal’s powers are limited to taking information from SMEs, investigating and helping them through a complaints procedure. Changing behaviour and holding to account larger business and especially public bodies this is not.
He said he will name and shame persistent late payers. I don’t think he has offenders quaking in their boots! Indeed, given the practices they condone in their firms, or turn a blind eye to, I don’t believe ‘shame’ is something executives worry about. The new badge of honour is having the hide of a rhinoceros.
Mr Uppal’s appointment was the second of two measures introduced by the Government to tackle the problem of late payment.
Previously, from April 2017, it introduced a legal requirement on large businesses to report via a publicly available Government website on a half-yearly basis on their payment practices, policies and performance for financial years beginning on or after 6 April 2017. Failure to report or reporting misleading information has been made a criminal offence punishable by a fine.
The legislation covers businesses above a threshold of:
* £36 million annual turnover
* £18 million balance sheet total
* 250 employees
By December 2017 only 29% of larger businesses that had reported had paid invoices within 30 days on average.
So much for the shaming strategy.

Stronger penalties on late payment are needed

The calls for tougher action are growing stronger.
A report by YouGov has revealed that legislation that would force payment of bills within 45 days is strongly supported by 61% of British companies with fewer than 250 staff.
The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and that public bodies are among the worst offenders, with 89% of suppliers to government reporting that they had been paid late.
From my work with SME owners, I am well aware that waiting for up to 120 days for payment by a larger customer can play havoc with your cash flow and can push you into insolvency if you aren’t brutal with agreeing and enforcing appropriate terms for payment of your invoices.
It is a difficult balance to strike, payment terms versus your relationship with important customers. Managing the relationship involves making sure that your terms are followed. You can be sure they will demand theirs.
While tougher regulation might enforce a maximum time for paying invoices, together with meaningful penalties for failure to comply, I would argue that you need to establish payment terms up front and then make sure they are observed.

How often should SMEs review business contracts?

In times of economic uncertainty, a careful business will regularly scrutinise its cash flow to ensure there are no hidden surprises.
When, as currently, costs rise profits decline unless sales prices, purchase costs and other expenditure are adjusted, and most businesses do this regularly by referring to their profit and loss figures in the accounts.
However, monitoring the management accounts does not keep an eye on the underlying obligations such as those for asset finance, service agreements or outsourced processes with both suppliers and customers where a review of these can identify scope for saving money.
Examples of cost savings following a review of contractual obligations include a recent client that was paying for computers on lease finance many years after the computers had been scrapped. The agreement provided for a three month notice that could have been terminated four years earlier. Another is the standard BT charge of £16.99 per month applied to business numbers to cover listing in their directory. It’s in the small print and very few clients seem to have spotted it.
Another good reason for a review of business contracts is that so many are old and out of date. An example is the agreement with suppliers. This is likely to have been struck as part of a credit application some years ago. An example is another client who had supply agreements with the major building materials suppliers including one with Travis Perkins that was fifteen years old. It was part of a credit application for as £10,000 facility and included personal guarantees given by the directors at the time. It was still in place despite all the directors having left and the facility being increased to £150,000.
So it makes sense to regularly review its business contracts.

Obstacles to changing business contracts

Having conducted a review of the contracts and identified any that are no longer fit for purpose, it may be necessary to seek expert advice and certainly to check the fine print as many contracts contain fees for early termination in the detail. Terminating leases is a particular area that needs advice.
While many agreements can simply be terminated against the contractual notice terms, others may require negotiation.
Even if terms for termination are reached it may be that help with drawing up a watertight and acceptable settlement agreement may be necessary. On the other hand, if agreement cannot be reached, this is where a specialist is needed.
Given the lack of legal experience and constraints on time in most businesses, reviewing contracts tends to be a low priority such that this should be done either as part of a formal annual review or it should be outsourced to advisers. As part of any review a company diary should be updated to flag any notice dates, termination dates and any specific agreements that might need a more frequent review.
What is not in doubt is that contracts should be reviewed regularly.