Late payments to SMEs on the rise

Published by Abbey Watkins on 27 June 2024

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Research from the accounting software company Xero earlier this year has found that late payments to small businesses has more than doubled over the last two years.  

Xero calls late payments ‘unapproved debt’ and estimates it costs businesses £1.6 billion in both interest payments and the time taken to chase customers.  

Currently, large businesses have a duty to report and disclose their payment practices. This applies to companies and LLPs that meet at least two of the following criteria: a turnover of £36 million, £18 million on its balance sheet, or a workforce of 250 employees. They must detail information about their payables days at least twice a year.  

The Conservative government has said it will crack down on late payment, saying it will require all companies bidding for public sector contracts worth over £5 million to be able to demonstrate timely payment practices to their suppliers. Its promise, as yet unfulfilled in part because of the general election, has been criticised by the Federation of Small Businesses, who said it needs to do more to stop big businesses using smaller ones to ‘prop up their cashflow’. 

The Labour Party in its manifesto makes a similar pledge, adding it will require audit committees to issue a report on late payments. 

Xero believes the problem is so serious that it has called on the Government to force companies to include in their annual report how much ‘unapproved debt’ businesses are carrying and to explain why they choose not to pay suppliers within payment terms. It is also calling on credit ratings agencies to factor unapproved debt into their credit scores.  

It is unlikely, however, that government will legislate anytime soon leaving small businesses vulnerable. 

So what can business owners do to better protect themselves from late payers? 

Make payment terms clear.

Make sure your customers understand your payment terms including when and how they should pay, and the penalties for late payment. For those businesses working on long term projects, consider payment schedules based on time or key milestones.

Automate invoicing and reminders.

Accounting software such as Xero and Quickbooks offer automated invoicing functionality and the ability to send reminders. They remain under-used and immensely valuable.

Understand your customers’ finance functions.

Build a relationship with the accounts payable teams with key customers. Understand their payment cycles and try to coordinate your own. Know when and who to chase.

Good management reporting.

Good management reporting will provide you with the information you need to ensure a healthy cashflow. Make sure those reports include an accurate schedule of debtors.

Check customer credit scores.

When taking on a new customer, review their credit rating and look for any early signs of a poor payer.  You may be able to use this information to request upfront payments or to decline a contract if the risk is too high.

Strong credit control.

Do not be afraid to chase for payment and chase regularly until payment is received. Your customers are likely to be doing the same and will not be offended by gentle reminders. And remember, the longer you leave unpaid invoices, the harder it will become to chase.

Your accountant can help advise on the internal structures and management reporting to give you the information you need to minimise late payment. If you need assistance with anything mention in this article, contact us today.

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