• Payment performance tracker –
    Q4 2020 update

    COVID-19 warning signs beginning to show for strained sectors

Article:

Payment performance tracker – Q4 2020 update: COVID-19 warning signs beginning to show for strained sectors

18 February 2021

Reporting on Payment Practices and Performance (PPR) for 6 months to the end of December 2020 has just completed for companies with a calendar year-end. We have analysed the results and can see whilst there has been no major shift, there are signs that average payment periods are increasing.

Based on the findings of our ‘Rethinking the Economy’ research, a survey of mid-sized companies conducted in collaboration with CensusWide, we can see that access to additional finance is cited as the biggest threat to business in 2021 suggesting many will be struggling with cash. Many of the 500+ businesses that take part in the monthly survey are experiencing a reduction in demand, which in some cases is affecting their ability to operate or at least causing liquidity issues. Seventy per cent of the respondents in our survey from December 2020 registered that they have less than 6 months of cash available, while 12% have no reserves at all. A similar trend is reflected in the numbers published by the Office for National Statistics (ONS).

Whilst there are still many fiscal packages available for businesses throughout the UK, such support cannot be guaranteed and it is unclear at the moment which changes will be made and when. It is therefore important that larger companies, with healthier credit ratings, are continuing to pay their smaller suppliers in a fair and transparent way to minimise impact and potential liquidity issues within the supply chain.

Prompt Payment code amendment

Recognising the cash flow challenges surrounding small businesses, a consultation was launched by the Small Business Commissioner in October last year to consider amendments to the Prompt Payment Code (PPC). By January, the amendments were announced.

Some changes came into effect immediately; however, the main amendment will be implemented on 1st July 2021. This is where 95% of small businesses (those with less than 50 employees) are to be paid within 30 days. This change halves the amount of time a company has to pay an approved invoice to its ‘small’ supplier.

According to data published by the Government at the beginning of 2020, there are around 6 million privately owned businesses in the UK, of which 5.94 million (>99%) are categorised as small. This means, in the vast majority of cases, those businesses signed up to the Prompt Payment Code will need to pay the majority of their supply base in 30 days from 1st July 2021.

BDO held a roundtable in October 2020 on the consultation and all companies in attendance agreed with the theory and drive behind the change. It was noted that there would be some challenges around the practicalities of:

  • identifying those businesses who qualify as small to facilitate the shorter payment
  • paying invoices within 30 days for those small suppliers, which continually find challenge with submitting a valid invoice for payment. It was felt that the spirit of collaboration needed to work both ways for this to be successful and sustainable.

Please find attached some Frequently Asked Questions we are hearing in the marketplace on implementation of the amendment to the Code.

On review of the most recent PPR data, we can see that there has been a significant increase in the number of companies signing up to a payment code:

In Q420, over 10% of the businesses that reported highlighted that they were signatory to a code, which is quite a significant increase since the regulations were introduced. This suggests that businesses see the moral and ethical reasoning behind payment codes and actively look to take part to play their role in fair payment practices. From the data, however, it is clear than many companies would currently not meet the 30-day requirement and therefore adjustments in process, and potentially working capital management practices, will need to be undertaken. As mentioned in our last briefing, the data we use to analyse the trends is from the Payment Practices and Performance Reporting portal. We make use of the data to analyse those companies that submitted data between July 2020 and December 2020.

The Trends

  • There has been a further reduction in the number of companies reporting when we compare submissions from Q418, Q419 and Q420. It is difficult to ascertain exactly why this may be but some caution is required when interpreting the trends
  • Quarter 4 submissions in 2020 are at 3,541, equating to a reduction of almost 850 companies reporting, based on a review as at 4th February 2021
  • We are aware that some non-compliant companies are being approached by the Department of Business, Energy and Industrial Strategy (BEIS) with the aim to rectify the shortfall

To find out if you should be reporting get in touch with one of our team.

Payment performance metrics by sector (click on the headings below)

  • Overall, the length of average payment days has increased from 34.6 days in Q3 to 37.7 days in Q4. It is difficult to draw conclusions as the representative sample is not the same in both data sets, however it suggests that payment practices may be worsening and should be monitored
  • We can see from the data the number of companies that have stipulated they have changed supplier payment practices since reporting started has also increased
  • It is clear that in Q3 and Q4 of 2020, the percentage of companies, which were reporting this, was at its highest of 4.3% and 3.2% respectively. This suggests that businesses are having conversations with their suppliers to negotiate and agree new payment terms that may negatively affect the supplier’s cash position. Whilst the population is still relatively low for the moment, it is a trend which we will continue to monitor


Trend analysis by sector 

  • Manufacturing, Hospitality and Retail & Wholesale remain at the top end of the list of sectors with the highest average payment days. We can see that the average payment days have increased however, for manufacturing, the percentage of invoices paid after the contractually agreed due date has decreased which is positive. This is unfortunately not the case for hospitality and retail, however the period analysed includes November during the national lockdown so hardly surprising
  • Again, public sector, education and health and social work activities are leading the way with their payment practices

Conclusion

Overall, there has not been a significant change in the last 6 months. This is most likely to do with Government fiscal packages currently available. As these will not be in place endlessly, now is the right time to be ensuring larger companies keep their payment practices and performance in focus to give the best chance to their smaller partners within the supply chain. This is demonstrated by the amendment to the Prompt Payment Code. The Manufacturing, Hospitality and Retail & Wholesale sectors may need to consider innovative ways to optimise their working capital position. 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 regarding the points raised in the article, please feel free to contact one of our advisors.

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;

  1. Fully understand your obligations or potential future obligations for reporting, and ensure a process is defined to facilitate accurate and timely reporting
  2. Use the metrics as a platform for positive change in Procurement and Finance processes to ensure timely and fair payment
  3. 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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