With England now out of its second lockdown and businesses facing yet another prolonged period of uncertainty as a result of the pandemic and post-Brexit transition, pressures on cash flow and working capital show few signs of easing.
Recent data published by the Department for Business, Energy & Industrial Strategy highlighted that £23.4 billion worth of late payments are currently owed to small businesses in the UK, impacting on cash flow and threatening the survival of small firms during COVID-19¹.
This – coupled with the latest ONS Business Impact of COVID-19 Survey noting that nearly 50% of businesses are reporting their cash reserves will only last 6 months or less – highlights the severity of disruption the economy is currently facing².
As such, it is important the entire business community continues to work together in a spirit of collaboration and partnership to ensure a fair market for all to operate within. Companies, particularly those that are larger, should be encouraged to transparently engage with their supply chain to ensure cash is flowing through the economy efficiently.
In our latest Payment Performance Tracker, we look at the trends evident from Q3 2020 and comment on how we are beginning to see the impact of COVID-19 affect how quickly large companies are paying their suppliers.
The UK Government recognises that thousands of businesses experience severe administrative and financial burdens because they are not paid on time. To address this, the Department for Business, Energy & Industrial Strategy (BEIS) introduced regulations which mean that all large UK companies now have a duty to report publicly on their payment policies, practices and performance.
This requires all large businesses - generally those with two or more of an annual turnover that exceeds £36m, a balance sheet of greater than £18m or 250 employees or more - to submit reports for each half-year detailing their payment performance to a Government portal.
We make use of the data to analyse those companies that submitted data during Q3 2020 – largely firms with a 31 March annual year-end date, meaning they were required to submit data covering April to September 2020 by 30th October 2020.
To find out if you should be reporting get in touch with one of our team.
Number of submissions by sector
- As we noted in our last Payment Performance Tracker, far fewer companies than in recent years are complying with the requirements and submitting their reports in a timely manner.
- Quarter 3 submissions in 2020 are at 1,653, representing nearly a 25% drop from 2,127 submissions and 2,139 submissions in Q3 2018 and Q3 2020 respectively (based on a review as at 3rd November 2020)
- The issue we are seeing with non-compliance is likely to be driven by a lack of focus given other business priorities, possible difficulties in extracting data while working remotely or simply a lack of resource.
Payment performance metrics by sector (click on the headings below)
- Hospitality businesses top the heat map for both longest average time to pay at 46.7 days and percentage of invoices not being paid within agreed terms of 39.8%. Although the sector commonly places at the upper end of the heat map, the scale of the increase reflects current sector pressures
- As with our previous Payment Performance Trackers, the manufacturing sector continues to remain towards the top of the heat map, but has not shown a material decline in performance versus previous years
- Construction firms, which commonly appear higher in the heat map than the fifth position currently occupied, have shown moderate improvements in performance compared to previous years. This is despite the industry slowing significantly during the outbreak of the pandemic and possibly reflects the continued efforts to open the sector up since the first UK-wide lockdown ended.
Trend analysis by sector
- The average days to pay across the whole dataset has risen from 33 days in Q3 2019 to 35 days in Q3 2020, while the proportion of invoices not being paid within agreed terms has risen from 26% to 29%
- 14 of the 17 industries are showing average days to pay increases from Q3 2019 comparatives. However, this compares with only 12 of the 17 industries reporting an increase in the percentage of invoices being paid outside the agreed terms
- Unsurprisingly, the Hospitality and Retail sectors are showing the largest decline in performance, with increases in Q3 2020 from the previous two years across all three payment metrics
- Conversely, payment performance by public sector bodies showed signs of improvement with the average percentage of invoices not paid within agreed terms dropping from 23.2% in Q3 2019 to 19.8% in Q3 2020. This was likely due to new procurement guidance issued in March which directed contracting authorities to pay all suppliers as quickly as possible to maintain cash flow and protect jobs
Larger businesses often struggle to pay promptly because of complex internal processes. However, there is arguably a moral obligation on those with adequate cash reserves to play fair and pay their smaller suppliers promptly. Many could do more to improve their working capital management, and adopt a more collaborative approach in order to prevent a culture of late payments being passed down the supply chain.
Where SMEs can do more to help themselves is by researching their customers’ payment performance on the Government portal, making sure they send their invoices in promptly, and checking that there are no errors as disputes can often lead to delays in payment processing times.
Supply chain finance as a possible solution
The number of companies in the UK that use supply chain finance (SCF) solutions has increased significantly over the past 5 years – especially among companies eager to improve cash flow, pay down debt and deliver more value to shareholders while supporting their supply chain. The Economist reports that supply chain finance is a £20bn market that represents 18% of all trade finance transactions.
The core concept behind SCF is to provide suppliers with access to advantageous financing facilities by leveraging the buyer’s stronger credit rating.
SCF is a solution that optimises cash flow by allowing businesses to lengthen their payment periods to their supply chain whilst also providing the ‘win win’ option of the supply chain being paid early. As such, the solution is mutually beneficial and can be a useful tool in helping ensure smaller suppliers are paid as quickly as possible.
To find out more about supply chain finance get in touch with one of the team.
What should your businesses be doing?
The current climate offers an opportunity for businesses to rethink their payment practices in the spirit of collaboration, as well as 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 to facilitate accurate and timely reporting
- Use the metrics as a platform for positive change in Procurement and Finance processes to ensure timely and fair payment
- Review your payment term model to support healthy cash flows in your supply chain
Find out more how BDO can support your businesses working capital strategy.
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