Why is prompt payment a priority in 2017?
Small businesses are the backbone of our economy. They represent over 99% of the five and a half million private sector businesses that make up UK plc, so they’re crucial to driving growth, opening up new markets and creating employment. But for decades, it’s been common practice among some large organizations to extend payment terms to smaller suppliers as a means to manage their own working capital.
Corporate governance is high on the agenda in 2017, as the Government pledges to build ‘an economy that works for all’ by levelling the playing field for growing businesses. Small and mid-size firms are currently owed £26.3 billion in late payments; this causes hardship by making cash flow unpredictable, and is responsible for an estimated 50,000 avoidable ‘business deaths’ a year.
With voluntary agreements such as the Prompt Payment Code having proved somewhat toothless, the Government is in the process of appointing a Small Business Commissioner. Starting in autumn, this role will be dedicated to tackling payment disputes with large firms and cracking down on controversial supply chain tactics.
New legislation has just come into force to root out late payment culture in large organizations, From 6th April 2017, large companies and limited liability partnerships will have to publicly report twice a year on their payment practices and performance.
The impact of new reporting legislation
The Payment Performance and Practice reports are held in the public domain. So if your company offers reasonable terms, pays promptly and resolves payment disputes quickly and fairly, this is an opportunity to position your business as favourable to deal with. On the other hand, a reputation for poor payment performance may mean some suppliers will be less keen to deal with your business in future.
Detailed guidance on statutory reporting duty was published in January but here’s a quick recap of the key points:
Who needs to report and when?
If your company or LLP exceeds two or more of the thresholds below, you are considered to be “in scope” and must report without exception.
£36m annual turnover
£18m balance sheet total
Six-monthly reporting aims to provide suppliers with access to timely information without putting an undue administrative burden on large businesses. Your deadlines will depend on when your financial year starts: your first report will be due within 30 days of the end of the first half of your first financial year following the introduction of the legislation, and the second within 30 days of your financial year end.
What needs to be reported and how?
You’ll need to provide a narrative description of your standard payment terms, any changes to them and how suppliers were notified or consulted, together with your processes for resolving payment disputes.
You’ll be required to report statistics on the average number of days to pay from receipt of invoice, the percentage of payments made within 30 days, 60 days or more, and the percentage of payments made outside agreed terms.
You’ll also need to answer check-box statements on whether you offer your suppliers options such as e-invoicing or supply chain finance, any charges or deductions you make from payments for the privilege of remaining on your preferred suppliers’ list, and whether your business is a signatory to any payment codes.
You will need to upload your information via an online portal, and reports will be published centrally through the Government’s web-based service. You may also opt to publish the information on your own website.
Preparing for change
Failure to disclose or false reporting will be a criminal offence, meaning businesses can be prosecuted and directors may face hefty fines. So it’s vital to get your house in order now, by conducting a thorough review of payment terms, practices and contract performance. You should also put a procedure in place that sets out:
who will prepare the report on behalf of your business
when your report will be prepared to ensure it’s ready in good time
who will approve the report before publication (and vouch for its accuracy)
how you will minute publication of the report at board level
An opportunity to streamline your P2P processes
Your company may not be intentionally using late payment or punitive terms as a means of regulating your own working capital. However, if your business is still manually capturing, processing and approving invoices, or you’re not enforcing the consistent use of purchase orders with a “No PO, No Pay” policy, you’re likely to have serious issues looming on your short-term horizon. You may find you’re simply unable to process invoices quickly enough to comply with payment deadlines, or capture relevant, auditable metrics for invoices and payments.
If so, now is the time to re-examine and tighten up your Purchase-to-Pay practices. Automating your P2P processes provides you with visibility and ease of reporting that benefits your business, as well as helping you minimize errors and duplicate invoices, resolve disputes efficiently and facilitate prompt payment.