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Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

Late Payments putting even more pressure on SMEs in 2020

late payments penalty?The amount owed to UK SMEs in late payments had allegedly risen to £50bn in early January according to research by digital banking platform Tide as reported by CityAM.
It has calculated that the average UK SME is chasing five outstanding invoices at once, wasting an hour and a half every day.
Data from Pay UK, which runs the Bacs Direct Credit and Direct Debit payment services, later in the month revealed that late payments had reached a four-year high last year at £23bn.
Tide’s new £50bn total was considerably higher than Pay UK’s total of £23bn owed to SMEs and I cannot reconcile the two figures.  The Tide research was conducted by Atomik Research among 1,002 SME decision makers from the UK and, it appears, judging by a footnote to the Tide report, that its £50bn figure may have been estimated on the basis of a total of 5.9 million SMEs, as calculated by The Department for Business .
However, the situation puts immense pressure on SMEs, with some having had to resort to overdrafts, cutting their own salaries and personal loans to pay bills because their own are being paid late. This is highlighted by Paul Horlock, chief executive of Pay.UK who has said that for the first time their research has revealed the human cost in stress and anxiety to SME owners.
Rashmi Dube of legal practice Legatus Law and former director of TMA UK wrote in the Yorkshire Post that a third of payments to the SME sector are late, leaving 37% with cashflow difficulties, 30% forced into an overdraft and 20% suffering a slowdown in profits, with considerable knock-on effects to employees as well as business owners.
In an attempt to ensure the Government promises to strengthen the regime tackling late payments, the Labour peer, Lord Mendelsohn, introduced a private members bill in the Lords, aims to bring in fines for persistent late payers, shorten the deadline by which clients must pay suppliers from 60 to 30 days and force all companies with more than 250 staff to comply with the Prompt Payment Code.
Although Private Members’ Bills from the Lords are not generally debated in the Commons the move serves as a reminder to the Government of promises it has made.
Prior to the December election a wider package of reforms had been promised, including improved resources and increased powers, a tougher Prompt Payment Code and Audit Committees’ oversight of payment practices.
One of these promises has at least been kept in part, with the appointment of Philip King as interim Small Business Commissioner following the sacking of Paul Uppal last November over an alleged conflict of interest and pending the appointment of a permanent replacement.
Mr King, who was previously chief executive of the Chartered Institute of Credit Management (CICM), which was responsible for running the Prompt Payment Code, is transferring the administration of the Code to his new office, fulfilling the commitment made by government in June last year to bring late payments measures under one umbrella. This is a useful measure as the  CICM was focused on training income and mainly funded by large companies. Following the move, we can expect to see the naming and shaming of those large companies who withhold payment to their suppliers, many of them SMEs.
Meanwhile In February, another 11 large businesses have been suspended from the Prompt Payment Code for failing to pay suppliers on time. They include BAE Systems (Operations) Limited, Leonardo MW Limited, and Smiths Detection.
However, for many SMEs the wait, in my view, for tougher and more effective powers with real bite beyond the current regime of naming and shaming has been far too long. How many have been forced to give up the unequal struggle in the meantime and fallen into insolvency?
 

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Cash Flow & Forecasting Debt Collection & Credit Management Finance Insolvency

First two companies named and shamed over late payment

late payment penalty?In March the first company to be named and shamed by the Small Business Commissioner Paul Uppal over late payment to a SME was announced.
The Office of the Small Business Commissioner launched an official investigation into the payment practices of the Jordans & Ryvita Company.
Using his new powers for naming offenders the Commissioner investigated Jordans & Ryvita on behalf of small business Magellan Design Ltd, which was owed approximately £5,000. As a result, the money was paid together with a further £1,400 in late payment interest.
This week the results of a second investigation, this time into health food retailer Holland & Barrett, were revealed. It was launched after a complaint from an IT company, which had asked not to be named, over an unpaid invoice of £15,000. The invoice took 67 days to be paid, well outside the company’s contractual agreement of 30 days.
Mr Uppal found that Holland & Barrett had “a purposeful culture of poor payment practices”, in which 60% of invoices were not paid within agreed terms and payment took an average of 68 days. He also condemned the retailer for not cooperating with his investigation, saying: “Holland & Barrett’s refusal to co-operate with my investigation, as well as their published poor payment practices says to me that this is a company that doesn’t care about its suppliers or take prompt payment seriously”.
Since the inception of the Prompt Payment Code and Mr Uppal’s appointment in December 2017 his office has released £3.5 million in late payments for small businesses and attracted 50,000 visitors to its website.

The effects of late payment to SMEs by large businesses can be catastrophic

The FSB (Federation of Small Businesses) has estimated that 50,000 SMEs each year close because of late payments and in July last year published research showing that 17 per cent of smaller suppliers were paid more than 60 days after providing an invoice, while close to one in five smaller suppliers are paid late more than half the time by the public sector.
While the latest results are a welcome development I would argue that until Mr Uppal is given powers to fine offenders they are unlikely to take this initiative seriously despite his efforts, for which some credit is due.
The Government’s Business, Energy and Industrial Strategy Committee has also repeated its call for Small Business Commissioner to be given the power to fine companies that pay late and for there to be a legal requirement to force them to pay invoices within 30 days.
I urge all SMEs to report late payment by large clients and especially well-known names so that more are named and shamed as a way of humiliating them into paying on time.
 

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Accounting & Bookkeeping Cash Flow & Forecasting Factoring, Invoice Discounting & Asset Finance Finance Insolvency

How can SMEs manage credit control and late payment effectively?

Prompt Payment Code: late payment penalty?There is no doubt that getting invoices paid on time can make a significant difference to SMEs’ cash flow and the lack of cash due to late payment can make or break a business.
Clearly, there are cash flow advantages for those late payers who string out paying their invoices for as long as possible, while the opposite is true for those waiting on the receiving end, often SMEs.
Towards the end of last year Xero Small Business Insights calculated that the average British small business is owed £24,841 in late payments on any given day.  It is clear that Government initiatives, such as getting businesses to sign up to its Prompt Payment Code, are proving less than effective. A year after the appointment of Paul Uppal, the small business commissioner, it was announced that his service had recovered just £2.1m in unpaid invoices on behalf of small companies. Pitiful!
All this has prompted the Government’s Business, Energy and Industrial Strategy Committee to call, yet again, for firms to sign up to the Prompt Payment Code and for the Small Business Commissioner to be given the power to fine companies that pay late. It says large firms should be legally forced to pay their small suppliers within 30 days.
In January Mr Uppal announced a traffic light warning system to be used to name and shame large firms that fail to pay their suppliers on time.
Will this strike terror into the hearts of persistent late payers and force a change of behaviour? I think not, although making it a criminal offence for directors would work, as currently is the case for HMRC’s Security Demands.

Do SMEs do enough to protect themselves from late payment problems?

Annual research by Bacs Payment Schemes showed that in 2018 small businesses in the UK faced a bill of £6.7bn to collect money they are owed by other companies, up from £2.6bn in 2017.
It is a problem that the FSB (Federation of Small Businesses) estimates is the reason for the collapse of around 50,000 businesses a year.
Some, however, would argue that SMEs should take more responsibility for and be more aggressive in recovering monies owed for the work they have done in good faith, but it’s hardly a level playing field. The cost of money claims through the courts is now horrendous.
Of course, a well-managed business should have a robust credit control system in place, which sets clear expectations from the moment it contracts for work, including a stated agreement with the client that invoice payment will be due within a defined number of days, usually 30.  It is wise to also credit check all new customers. It is also wise to check payment is scheduled for payment before it is actually due; this deals with most excuses in advance.
Payment should be made as easy as possible with online banking details and address for postal payments included on all invoices. If it is feasible perhaps a small discount could be offered to those who pay early or within a stated time period. A supplier to one of my manufacturing companies offers 90 day payment terms with a 40% discount if payment is made within 30 days. That’s my margin so late payment is painful.
The credit control system should also have clear, robust procedures for following up on late payers, from sending out reminder letters that make it clear that failure to pay will likely incur significant costs and disruption such as suspension of the account.
However, even with a robust system in place, and one on which the business acts, there may still be late payment problems and SMEs can use such services as factoring, where another company takes on responsibility for collecting and chasing invoices, or invoice discounting, where, again, another company takes on the task of chasing invoices but with the SME having ultimate control.
In both cases, however, these are fee-paying services, effectively “lending” money up front to the SME at less than the full value of the outstanding invoices. If you use such services do be aware that many have a recourse clause so make sure to check if you remain liable or have to reimburse the lender.
While borrowing against book debts might improve an SME’s cash flow, it comes at a price and often with hidden additional costs and conditions in the small print. This is where an independent broker, not an online one, is a useful ally when looking for book debt finance.
Another option is to take out credit insurance although this normally only pays out in the event of your customer going bust and doesn’t solve the late payment problem.
Why should a business have to pay extra/ lose part of its revenue in order to recover money promptly for work it has done in good faith?
What is needed is robust, effective legislation, and follow-up action, with sufficient teeth to eradicate this persistent problem once and for all.
A free guide to debt collection for SMEs is available for download at:
https://www.onlineturnaroundguru.com/p/getting-paid-on-time

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Accounting & Bookkeeping Cash Flow & Forecasting Debt Collection & Credit Management Finance

Late payment regulations need beefing up

late payment penalty?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.

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Accounting & Bookkeeping Cash Flow & Forecasting Finance General HM Revenue & Customs, VAT & PAYE Insolvency Rescue, Restructuring & Recovery Turnaround

Record keeping and HMRC communication

SMEs should be prepared for HM Revenue and Customs (HMRC) to become more aggressive in following up on late payment and tax avoidance.
MPs criticised HMRC this month after it emerged that the difference between the amount it should collect and its actual collection total had increased by £1 billion (from £33bn to £34bn) in the year to April 2013.
The tax gap is also forecast to increase by a further £3bn for the year to 2014.
The House of Commons’ Public Accounts Committee has also criticised HMRC for not doing enough, quickly enough in tackling tax avoidance schemes.
SMEs are arguably easy targets when HMRC is coming under pressure so they would be wise to ensure that their records are all in order and payments up to date.
It is important to keep copies of all filings and communications with HMRC, preferably confirming phone calls in writing and to not ignore any communications from them.
If you are unable to pay a liability, they are helpful and providing you are proactive they will agree payment terms. If you do agree payment terms then stick to them otherwise they won’t believe any other undertakings you give so make sure your cash flow forecasts are realistic.
Independent of making any payments, make sure your various tax returns (VAT, RTI -PAYE and corporation tax) are submitted on time to avoid automatic penalties.
If it is all becoming too much, remember tax is one area where early help from a professional can be invaluable.