Businesses are still facing extraordinary pressure on cash flow and a significant challenge when it comes to paying supplier invoices on time. New research from BDO shows that while there has been no significant deterioration in payment practices because of COVID-19 to date, large companies appear to be falling behind in their reporting obligations. As government financial support programmes begin to wind down, there is a real opportunity to rethink attitudes towards payment practices and working capital management and for the entire business community to come together in a spirit of collaboration and partnership.
Payment Practice and Performance Reporting requirements
Pockets of poor payment behaviours across the UK are not new. The Government has taken a big role in encouraging the flow of cash and liquidity throughout supply chains. Since 2017, there has been a legal requirement for businesses generating annual revenues in excess of £36m to publically report on their payment practices and performance. The reporting was introduced to encourage larger companies to pay their smaller suppliers in a fair manner, as well as provide transparency for all. While some have made progress since the introduction of the new rules, there is still clear pressure on cash for many with a culture of late payments passed along the supply chain.
Analysis of recent performance on payment practice
We have analysed recently published data on payment practices. We can see many are maintaining pre COVID-19 payment performance, which is positive news. However, almost 1,000 fewer companies reported this year compared to the same period in 2019.
Quarter-on-Quarter comparison suggests that there are currently around 1,000 fewer companies that have reported on time this year compared to last. This suggests a potential issue with compliance and is likely due to a lack of focus given other priorities, possible difficulties in extracting data while working remotely or simply a lack of resource.
Every business that has a requirement to report, but has not submitted a report, is at potential risk of committing a criminal offence under these regulations. There may also be businesses, which have reached reporting thresholds since 2017 and which now have a requirement to report and are unaware of their obligations.
Payment performance of those who have reported has held up
There has been no significant deterioration in payment practices because of COVID-19 to date. Payment periods in days and percentage of invoices not paid within agreed terms are the main indicators. They have remained relatively consistent at 38 days and 30% across the entire population.
Bigger companies do better on payments
In fact, there has been a slight improvement by companies with revenues in excess of £1bn, reducing the percentage of overdue payments by 2% which is encouraging news.
The worst performing sectors remain weak
While manufacturing, hospitality, construction, retail, and wholesale remain the sectors with the longest payment periods, the data suggests there is little movement from pre COVID-19 levels so far.
While it is difficult to draw conclusions with many companies still to report, payment practices appear to be holding up. This may be in part due to considerable government subsidies available over the period analysed.
The publicly available data is becoming very rich in terms of insights. It should be an important tool in every business’ credit risk management process. Many business’ customers and suppliers will be reporting on their payment practices. That information can support credit control processes, assist in payment term negotiations, and potentially provide a red flag for businesses that are struggling. It is also a good source of information with which to challenge poor performers.
The payment data reported on the gov.uk website is an important tool for suppliers. Using it will help to ascertain whether the actual payment performance of a potential customer is sufficient to manage your cash flow. This will help avoid any avoidable surprises, potentially indicating the financial health of prospective customers.
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 late payment.
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 Payment processes to ensure timely and fair payment
- Review your payment term model to support healthy cash flows in your supply chain and consider:
- automation of working capital cycle
- introduction of clear working capital key performance indicators with supporting governance model
- embedding of a cash culture.
Introduction of clear working capital key performance indicators with supporting governance model
embed a cash culture.
At BDO, we use our Rethink framework to identify the key stages, issues and opportunities you should consider as you progress towards succeeding post COVID-19.
For any questions on how you can adapt your fair payment practices or optimise working capital management in a phased way using this approach, please contact Jenny Shutt or Tim Foster.
For further reading, we have produced a helpful payment-reporting guide to take all businesses through key milestones and criteria to report.