Summary
- The data indicates year-on-year improvement in payment practices, with 25% of invoices not being paid on time (26% Q4 2021, 28% Q4 2020), however, care should be taken as fewer companies are reporting. This could signal that the slowest payers are choosing not to submit their data.
- Most sectors are showing improved performance - one notable exception is Manufacturing, showing a significant increase in days to pay. This is likely to be a symptom of reduced confidence across manufacturers given high energy costs, rising inflation and uncertainties in their short to medium term demand profile.
- With Payment Practices fast becoming a key lens through which to assess a businesses’ focus on ESG, Boards should be considering their reporting performance and working with their suppliers to develop long-term, sustainable relationships. This should be done as part of a wider working capital optimisation programme.
Read on to see what Liz Barclay - Government’s Small Business Commissioner has to say as well as our observations on the nation’s latest payment practice data.
THE TRENDS
This quarter’s report focusses on large businesses that have submitted their Payment Practices and Performance reports covering the second half of 2022. As a result, it provides a useful barometer of how the inflation, energy costs, Brexit and supply chain uncertainties have affected the payment behaviours of those large companies.
Q4 2022 vs Q4 2021
Industry average time to pay (days)
- A number of industries are reporting a significant improvement in their average time to pay. This is positive given the current macroeconomic environment and signals a degree of resilience across large U.K. businesses.
- However, take this with a pinch of salt because reporting numbers are down. This could signal that the slowest payers are choosing not to submit their data.
- Manufacturing (a sector that has a history of consistently taking the longest times to pay) re-establishes its position as the weakest performing sector.
Average % of invoices not paid within agreed terms
- 13 out of 17 sectors have reported a decrease in invoices not paid within agreed terms.
- Nevertheless, even amongst these sectors, 1 in 4 invoices are still not being paid on time as contractually agreed.
- This somewhat tarnishes the positive indication of improvements as a significant proportion of industries are still not meeting contractual terms.
Average % of invoices paid after 60 days
- Manufacturing is the worst performing sector. The number of large businesses paying later than 60 days increased by 10 percentage points versus last year (14% to 24%). This is likely a symptom of reduced confidence across manufacturers given high energy costs, increased inflation and uncertainties in their short to medium term demand profile.
- With the exception of Manufacturing, Water & Waste and Retail & Wholesale, all other industries show an improvement in this metric. This potentially demonstrates a level of responsiveness from large businesses that adverse payment polices damage longer term sustainability and business relationships.
Richard Austin, BDO Head of Manufacturing says: "Manufacturers have been particularly adversely affected by the current economic climate, with extended supply chains, the challenge of quickly reflecting inflationary pressures in factory gate prices, and the need for increased inventory to reflect volatility in demand and supply. All of this puts pressure on cash and working capital cycles. Extending supplier payment terms is a quick lever to alleviate this pressure but is a short-term fix. Manufacturers that identify and implement improvements to their operating models will ensure they remain competitive and sustainably profitable."
Number of companies reporting
Despite the regulation having been in place for a number of years, there are still a significant number of companies that are not reporting. (6% year-on-year decline and 12% decline compared to Q4 2021).
BDO has cross-referenced the reporting threshold requirements against a database of all active U.K. registered companies and observed that, despite the regulation having been in place for a number of years, there are still a significant number of companies who should be reporting that are not.
This signals a potential issue. Businesses that are not reporting are likely to be the ones with poorer performance. Thus, the current trends shown may be overstating positive performance.
It is our understanding that whilst BEIS has adopted a more lenient approach over the last 18 months, tracking payment performance becomes futile without representative data. We expect there will be follow-ups with non-compliant entities over the coming months.
Liz Barclay, Small Business Commissioner says: "I am concerned about the reduction in firms reporting. In order for the data to be meaningful we need all the big firms that should be reporting to comply with the legislation. However, I am very pleased that conversations about payment practices and performance are going on in Board rooms. Too many Chairs and NEDs assume that payments are merely an operational consideration. With would-be investors, pension funds, talented people as well as suppliers looking at the data to see how well a company pays, good payment practices are now a must-have. Paying late, extending payments, pushing more invoices into the disputed pile not only damages reputations but gets people thinking that the financial health of your firm may not be as robust as it was."
What should businesses be doing?
The current climate offers an opportunity for businesses to rethink their payment practices in the spirit of collaboration, as well as to optimise overall working capital management to counterbalance any impact from extended payment periods.
These are our three key recommendations for rethinking your payment practices:
- Fully understand your obligations or potential future obligations for reporting and ensure a process is defined for accurate and timely reporting.
- Use payment practice data to drive improvement in procurement and finance processes to ensure timely payment.
- Review your payment term model to support healthy cash flows in your supply chain.
- Consider your businesses performance in light of your ESG goals and responsibilities.
Conclusion
Although the Manufacturing industry showed significantly weaker performance, our analysis suggests that the majority of sectors and large businesses have demonstrated a good level of resilience despite the significant difficulties faced by UK companies with the inflation and energy crises.
That said, there are clearly compliance issues that need to be addressed and this positive trend may be being overstated.
Communication with key customers and suppliers is critical over the coming months. As always, we encourage businesses to regularly review the data set in relation to key customers and clients as it provides a good indication of payment performance trends and potentially highlights possible credit risk. We will continue to monitor the trends over the coming months.
Should you have any questions, please feel free to contact Ross McWhir.
