We are fortunate in having some good contacts across the Scottish business world who from time to time write some really interesting guest blogs for us. This one tackles one of the perennial problems for all companies, whether big or small, but especially the SMEs which are the backbone of the economy...
Late payment is back in the new, courtesy of the story that appeared in The Times recently. This article introduced us to Paul Uppal, described as “the man with the unenviable task of tackling Britain’s chronic habit of paying its dues late.” More specifically, he is the UK’s first “Small Business Commissioner,” charged by the government to help companies get their bills paid on time. There is, however, one significant problem. Mr Uppal says that in his days running a small construction firm he would have been reluctant to use such a service. And almost everyone who has run a small business, especially in construction, knows exactly what he means.
That’s a pity, because it’s a very real problem, with the Federation of Small Businesses estimating that late payment causes tens of thousands of firms to go bust every year. Moreover, there are regular instances of contractors being bullied and large contracts being changed midway to more disadvantageous terms. Mr Uppal is reported as saying, “Some of the contractual stuff I’ve heard going on is worse than bullying, it’s abuse. For many small businesses, it’s a dream to get a deal to supply a large company. Often, it’s the start of a nightmare.”
It is a nightmare for the firms involved, but the government does not help itself. The existing voluntary code for “prompt payment” says “that contractual terms should be adhered to and invoices paid in 60 days other than in “exceptional circumstances.” Leaving on one side the fact that 60 days is hardly prompt, it’s also worth noting that this is the voluntary code that Carillion signed up to…
So yes, it’s a perennial problem for businesses, especially small businesses, but despite the fact that legislation exists to allow companies to take action against late payers by charging interest on outstanding debts, virtually no-one does so, largely for fear of offending their customers. Sometimes, as in the case of Carillion, it’s too late and there is no customer left to offend, just a huge write-off to hit the bottom line.
Over a long career in the corporate world of what used to be called recruitment advertising, I had much experience of this problem. We used to have an internal target of 42 debtor days, with internal fines and rewards for exceeding or beating it. As one of the offices I was responsible was in Ireland this was hopeless: the Irish persistently paid their bills at least 10 days later than our 42 day target and were quite relaxed about doing so. I don’t know if they have improved since then but I do remember earnest articles in the Irish Independent bemoaning the signal it sent to businesses wanting to invest in the country.
It was also my experience that the bigger companies were the worst. One huge European aerospace firm took well over 100 days. An oil services company wrote to us to say that all suppliers were to be on 90 days. At this time, most recruitment advertising was in the press and if we didn’t pay their bills on time then they would simply refuse to take our clients’ ads. Consequently, the graph of our cash-flow was a huge series of curves, demonstrating that we were extending credit to our clients for several days if not weeks every month.
Then there was the public sector, which, you would think, ought to pay its bills on time. Most do, but one or two (a major university and a major Health Board) were dreadful. The universities also used to use the excuse that they were closed over Christmas and the New Year to justify late payment in January/February.
Fast forward to self-employment and the concern that, as a very small business, cash flow would be an issue. In fact it’s been generally fine. I’ve only had to get my lawyer to two firms, and on both occasions a strongly-worded letter did the trick. The vast majority of my customers pay their bills on time and I’ve noticed that the smaller the firm the quicker they pay. I make a point of reciprocating and paying not just business suppliers but tradesmen and others doing work in our house in days rather than weeks. So should everyone else, especially the big companies!
Alastair Blair, thePotentMix