73% of UK SME’s have experienced late payment in the last 12 months and on average are paid 41 days later than the terms agreed.
This is despite moves to try to improve things like the Prompt Payment Code
The Prompt Payment Code (PPC) aims to improve the supply chain cash flow for UK firms by tackling the issue of late payment.
The Code is sponsored, hosted and administered by the Institute of Credit Management (ICM) on behalf of the Department of Business Innovation and Skills (BIS).
Code signatories undertake to:
pay suppliers on time
- within the terms agreed at the outset of the contract
- without attempting to change payment terms retrospectively
- without changing practice on length of payment for smaller companies on unreasonable grounds
give clear guidance to suppliers
- providing suppliers with clear and easily accessible guidance on payment procedures
- ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers
- advising them promptly if there is any reason why an invoice will not be paid to the agreed terms
encourage good practice
- by requesting that lead suppliers encourage adoption of the code throughout their own supply chains
The Prompt Payment Code has the backing of the UK Government, the British Chamber of Commerce (BCC), the Confederation of British Industry (CBI), the Forum of Private Business (FPB), The Federation of Small Business (FSB) and the institute of Directors (IoD).
Financial software firm XERO issued the research, which revealed that:
- Over half (52%) of UK business owners worry about unpaid invoices
- Worst affected regions found to be London where businesses spend 1.5 days per month chasing payments, followed by 1.3 days by businesses in Wales
- The business sector spending the most time chasing payments was found to be HR (3 days), followed by IT & Telecoms (1.8 days) and Manufacturing & Utilities (1.7 days)
It also showed that the two main reasons cited by small business as being the causes of late payments were that their customers were also waiting for payments themselves (32%), as well as a lack of consistency on payment terms (27%).
For SME’s understanding their Cash Cycle is critical as lack of cash flow will kill your business, here is a example of how to calculate the cash cycle
This means that you need enough cash in your business to finance 50 days worth of sales. If your sales are £1,000,000 per year, you will need cash of £136,986. In practice, your business will probably need more cash available than this to pay for rent, rates, wages etc. You may also get cash spikes at the quarter end if you pay VAT.
Here is a brilliant Cash Flow Improvement Tool from NAB http://oms.nab.com.au/media/10/power_of_one/CF.html
This model quickly and easily calculates your cash cycle but also shows the effect of making improvements.
Having discovered what the cashflow cycle is, what can you do to improve it? well that depends, assuming you have agreed the best possible terms with your suppliers, you need to find ways to speed up cash received from Customers, if your business Sells to other businesses the first thing to look at is Credit Management.
CIMA have produce a comprehensive guide http://www.cimaglobal.com/Documents/ImportedDocuments/cid_improving_cashflow_using_credit_mgm_Apr09.pdf.pdf
But Credit Management may not be enough on its own, perhaps Invoice Finance might help?
Invoice discounting is an excellent, cost-effective way for certain businesses to improve their cashflow position.
- Invoice discounting is most suitable for businesses with good financial controls in place and a strong financial background.
- Invoice discounting is suitable for business with an established credit control department.
- Invoice Discounting is suitable for a wide range of businesses including manufacturers, wholesalers, transport firms, employment agencies and providers of some business services.
- Suitable businesses for invoice discounting are growing businesses because the level of funding grows in line with increasing sales.
In August 2013, the UK Government became a Buyer of invoices on the MarketInvoice Platform, investing directly in UK SMEs looking to access working capital and grow their businesses.
How does it work?
Any company can use MarketInvoice provided its sells goods or services to other large businesses.
Its a ‘pay as you go’ service.
Companies are vetted and the invoice must be to a large corporate not to other SME’s.
Its confidential so your customer will not know you have used MarketInvoice, if the customer doesn’t pay you will have to refund the investor.
There are other similar products on the market from other providers so its worth considering the options available.
Don’t let lack of cash flow kill your business!
