FDs to be held personally responsible for prompt payment
Finance directors signed up to the Prompt Payment Code (PPC) will take personal responsibility to ensure small business suppliers are paid within 30 days under new government reforms to crack down on poor payment practices.
The PPC reforms aim to take prompt payment to the highest level of an organisation by requiring finance directors, CEOs and business owners to personally sign the code.
From 1 July 2021, the signatories will pledge to pay 95% of invoices from small business suppliers (less than 50 employees) within 30 days or else the suppliers can charge interest on late invoices under the code.
This payment period has been slashed in half, as PPC signatories had previously committed to paying 95% of all payments to their supply chain within 60 days. This target will remain unchanged for larger businesses.
The new changes, which come into immediate effect, also oblige businesses to enable administrators of the code to investigate breaches based on third-party information.
Announcing the overhaul, the new business secretary Kwasi Kwarteng called on big businesses to “settle suppliers’ bills on time”.
“Late payments jeopardise the survival of SMEs and the jobs they support - this culture must end,” Kwateng said in a Twitter post.
In an effort for businesses to take personal responsibility, signatories will be given a new logo for their external communications. The government expects this public commitment to the code will make it more damaging for companies to breach it.
Businesses that fail to uphold the payment practices under the PPC will be publicly struck off the code until they have made substantial changes and rectified their late paying ways.
It remains to be seen whether the 2,800 PPC signatories is enough to make a dent in the bad practice of late payment. Perhaps a bigger stick is yet to come, as the government seeks to hand the small business commissioner new powers to crack down on bad practice, including legally binding payment orders, launching investigations and levying fines.
Small business welcomes reforms
As expected, the reforms have been largely welcomed by the small business community.
Xero’s UK managing director, Gary Turner called the overhaul a “positive step”. Xero has previously campaigned for more efforts to tackle the culture for late payments.
“Too many large businesses fail to recognise their duty of social responsibility when it comes to paying SMB bills on time,” said Turner on Twitter. “A thriving SMB economy (contributing ~50% of UK GDP) has never been more vital for the future of the whole economy.”
Federation of Small Business chairman Mike Cherry backed the swift delivery of the PPC and the adoption of the 30 day maximum payment period. “Ending our pernicious poor payment culture for good over the coming months will be fundamental to turning our hopes of economic recovery into reality,” he said.
Late payments are the perennial thorn in the side of many small businesses and result in around 50,000 shutting their doors permanently every year. The cashflow challenges presented by late invoice payments have been especially acute throughout the coronavirus pandemic, as demonstrated by the £23.4bn worth of late invoices owed to firms across the country, and threatens their survival.
Cashflow has become such a struggle for small businesses during the pandemic that 67% of accountants in a recent survey rated it their biggest concern.
Confederation of British Industry’s chief UK policy director, Matt Fell said the new rules will “drive faster payments to smaller businesses will strengthen supply chains, benefiting the firms that need it most, and shortening the road to recovery”.
PPC reform 'isn't enough'
AccountingWEB regular and finance director Tom Cadogan thinks this strengthen version of the code is a step up from the previous scheme which was "counter productive".
"When the previous code was introduced, customers asked us to extend their 'official' credit terms to match the credit they were taking anyway, and thus make the customers appear to be paying on time.
"This more recent scheme appears that it could be more effective by actually defining the acceptable time frame."
However, Nick Jackson, CIMA’s president and finance transformation leader at Oracle, doesn't expect this change alone will be “enough to solve a culture of late payments”.
“It’s not a simple question of if businesses can pay suppliers on time. They can – but they may not have the right tools in place, or a proactive approach to working with suppliers,” said Jackson, who championed the use of cloud and automation in managing deadlines and identifying where early settlement can yield discounts.
“If finance teams can access information and data from anywhere in the business, make predictions on which payments will be needed, and when, suppliers stand a much better chance of being paid on time.”
An FD's guide to prompt payments
Tom Cadogan, better known by his AccountingWEB username Tom123, draws on his 20 years manufacturing experience and role as an finance director to provide a helpful guide to dealing with prompt payments.
Will the changes to the prompt payment code be effective enough to ensure faster payments and guarantee small businesses are paid on time?