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The Effect of Late Payments on Productivity and the UK Economy

11 May 2018

5 minute read

The Effect of Late Payments on Productivity and the UK Economy

I work in an organisation where I get paid monthly for the work that I do. I get paid at the same time every month and I always receive the agreed upon amount that is in my contract of employment. Nothing out of the ordinary there, and pretty much what every employee up-and-down the country has a right to expect. So why is it that when it comes to commercial contracts, so many organisations pay their suppliers late?


It seems to be endemic in the UK. A culture of late payments combined with, in some cases, extremely long payment terms - up to 180 days in arrears (Carillion was notorious for paying on terms of 120 days). Not only does that seem excessive, it seems immoral.

At Basware, we commissioned a piece of research in conjunction with YouGov, surveying 2036 small and medium businesses (businesses with less than 250 employees), and asked a series of questions about how they were paid by suppliers, and what the direct effects of late payments were on them?

The results, although astonishing, didn't come as a massive surprise to us:

A quarter of those we surveyed, said that their businesses had been adversely affected as a result of late payments.

When you think that the UK has almost 2.7 million small and medium businesses that account for £1.9 trillion of GDP, that's around 665,000 business that are affected each year. Worse, 18% of those surveyed said that they had to put recruitment on hold, and a further 13% had let staff go because of this late payments culture.

The ramifications of late payments are clear: UK PLC is suffering.

The UK is facing a time of great uncertainty with Brexit looming large on the horizon. Whether you were for or against it is no longer pertinent. What matters now is how we approach it. Personally, I'd like to see the UK being able to face whatever comes as a competitive, productive and thoroughly modern economy. Late payments let us down badly and put us in a tough competitive position. It's therefore no surprise that the research found that small businesses were overwhelmingly in favour of introducing legislation to limit payment terms to 45 days - 61% of them in fact compared to just 10% who didn't.

Many commentators in the space are busy waging a war not on late payments, but rather, on big business as the main culprit in paying their suppliers late. This is unhelpful and wrong. Whilst big business can do more, the challenge affects businesses large and small, as well as Government and local authorities.

The problem underlying this is more about antiquated systems and processes that were built in the 1980s and 90s and haven't been modernised since. That's borne out by how the UK is continually falling behind on productivity - In an article recently published by Bloomberg, Bank of England data suggested that UK productivity was back at levels last seen around the industrial revolution! If you needed further evidence, despite expectations in The City that when the BoE Monetary Policy Committee met earlier this week we could all expect to see an interest rate rise, they backed away from that when growth figures for the first quarter from the Office for National Statistics (ONS) showed dismal growth of just 0.1%.

Most of the rest of Europe has already moved to e-invoicing, sending digital invoices electronically between suppliers and their customers. This applies across all types and sizes of organisations. This one move alone means that invoice processing can become almost instantaneous, and both errors (another major cause of late payments), and costs (printing, posting and processing, depending on the level of sophistication) get massively reduced - In a paper we published last year with iGOV, the data cited showed it costs Government £13.98 on average to process a paper invoice, versus £4.77 for those processed via e-Invoicing methods*. This is doubly painful to read. Not only does it directly impact productivity, it also drains public finances - just think about how many millions of invoices the Public Sector processes every year?

It costs Government £13.98 on average to process a paper invoice, versus £4.77 for those processed via e-Invoicing methods*

The irony of all of this is, pretty much every business and organisation is capable of producing true electronic invoices from any word processing, spreadsheet or accounting software. The same applies to large enterprises and Government who use large-scale Enterprise Resource Planning (ERP) software with the same abilities.

This is a pretty simple fix, so why aren't more companies adopting it?

The truth is, too many organisations are focused on big, hairy audacious goal chasing, and simple business administration processes, practices and policies simply get ignored as being "non-strategic". Well, we looked at this in detail, and calculated the possible benefits including revenue/profit impacts for each retailer, manufacturer and life sciences company in the FTSE 350 - there were 157 of them - and found that the average bottom line impact of modernising and automating source-to-pay processes for them worked out to £48.6 million. Yes folks, that BOTTOM LINE IMPACT.

The average bottom line impact of modernising and automating source-to-pay processes for a FTSE company is £48.6M**‚Äč

Bit more "strategic" now, right?

And that doesn't even take into account the knock-on benefits to the wider economy: the ability to tackle the late payments culture; the relief it will generate for small and medium enterprises, and alleviation of the perennial productivity issue.

So how are these benefits realised? Through the modernisation, digitisation and automation of these out-of-date processes.

The challenges are clear. The benefits are even clearer. Come on UK PLC! Time to wake up and get competitive! It's time for another revolution!

*Basware & iGOV e-Invoicing in Local Government Survey Report, October 2017; source: Carter, S. (n.d.) ‘Public Sector e-Invoicing Cutting Costs & Improving Service’

**Basware & Adjacency calculations based on data from 157 retailers, manufacturers and life sciences companies listed in the FTSE 350, March 2018

Louis is Vice President and Country Manager for the UK and Ireland at Basware, a global leader in payments and spend management. More details at