Late payments on the rise: ICAEW urges No.10 to help

The ICAEW has urged Boris Johnson’s new Government to help businesses with the increasing problem of late payments faced by SMEs.

The latest BCM (business confidence monitor) showed that business outlook remains negative, with late payments from customers a key and growing concern among businesses, and particularly SMEs.

Late payments are a greater challenge than they were a year ago for one in five businesses, according to the report, while six out of nine sectors (Property, Business Services, Manufacturing & Engineering, Construction, Retail & Wholesale, and Banking, Finance & Insurance) are experiencing this as a growing issue.

The problem is even larger for SMEs, with almost a quarter (24%) reporting this as a problem.

Tim Gardiner, Finance Director at Panton McLeod Limited said: “The most obvious case of abusive slow payers is still large corporates, particularly in the construction industry.

“A large part of the problem is where companies have complicated processes for the submission of invoices or claims for payment, combined with a lack of clarity as to who is the contracting company in relation to large scale projects.

“This arises from intermediaries acting on behalf of utility companies in my experience.”

According to statistics released in May by the federation of small businesses (FSB), 50,000 small firms go out of business because of late paying clients, and it is a clear problem that needs addressing.

Brexit not the only problem for businesses

Around two fifths of businesses also reported regulatory requirements and customer demand as increasing challenges.

Following the report, the ICAEW has urged No.10 to remember that businesses are facing problems other than just those presented by Brexit.

Michael Izza, ICAEW chief executive, said: “The Prime Minister has promised Brexit by 31 October and the overriding priority of his government must be to get a good deal. More than anything else that will give business the stability it is crying out for.

“However, this feedback from our members, who advise businesses in every sector and level of the economy, reminds us that they face other challenges as well, many of which have little to do with Brexit – such as late payments and the regulatory burden.

“Robust Government action on these issues could make a real difference to the business environment, especially for SMEs, and would help to restore confidence and momentum.

“That would go some way to unlocking the economy and ensuring it is in the best shape to face the challenges and opportunities of life outside the European Union.”

Why do companies pay late?

Earlier in the year, Bottomline, a software company that specialises in business payment solutions did a study that found 92% of businesses they spoke to admitted to paying suppliers late.

The figure and willingness to admit doing so shows the lack of accountability when it comes to late payments.

Speaking on the figures, Dr Louise Beaumont, an independent chair, advisor, investor and expert on the subject of late payments gave insight into why businesses are paying late, saying: “It varies. Sometimes they’ll say the quality wasn’t quite what we expected so they withheld payment, or that they found a typo on the invoice, so they kicked it back to buy themselves a little bit more time.

“Sometimes they say their payments processes are terrible, so their own processes get in the way of them paying on time. And some say they withhold pay to protect their cash flow and prioritize other payments.”

Dr Beaumont said that business pay late “Without understanding the vulnerability they are baking into their own business by doing that. Because if you rely on suppliers, and most companies do, putting them [suppliers] in a position of absolute vulnerability is an act of self-harm.”

For a full Q&A with Louise Beaumont, click here.

Government faced derision from SMEs earlier in the year

In June 2019, the Government announced a range of measures in an attempt to tackle the UK’s £16bn late payment problem, but the measures were heavily criticised by organisations, including the Association of Accounting Technicians (AAT).

The then-outgoing Chancellor, Phillip Hammond MP, met with the CBI and FSB in an attempt to promote the measures, saying after the meeting: “We have already taken steps to wipe out the UK’s late payment culture. Businesses leaders were clear today that more can be done to end this blight – including through the use of innovative payment platforms.”

Small Business Minister Kelly Tolhurst MP added: “We recently announced ambitious new measures to ensure small businesses get paid on time. This includes holding company boards accountable for payment practices and proposing new powers for the Small Business Commissioner.”

However, this was not enough to persuade business owners and industry experts that enough was being done to tackle the problem.

Peter Humphrey of Kesblade, a small property firm based in Rochester, the small business minister’s constituency said: “The latest Government announcement on late payments was extremely disappointing.

“Moving the Prompt Payment Code to the Small Business Commissioner is like shuffling the chairs on the titanic, it doesn’t change anything other than the owner. Likewise, a technology fund that amounts to around 17p for each British business is utterly pathetic.

“Big business should be forced to sign the Prompt Payment Code and pay their suppliers in a maximum of 30 days like AAT has repeatedly recommended. It’s not rocket science but the Government just doesn’t seem to get it.”

Another Small Business owner, Caroline Danks, owner of LarkOwl a small fundraising business in Devon, added: “The Government doesn’t seem to understand small business.  A tiny technology fund, moving responsibility for the Prompt Payment Code and adding more bureaucracy onto company boards will do nothing at all to end the multi-billion pound problem of late payments.

“As the AAT campaign has shown, there is a lot of business and political support for a simple solution – compel large organisations to sign a beefed up Prompt Payment Code that requires everyone to pay at least 95% of their invoices within 30 days, not 60, with fines for those who consistently fail to comply.

“It’s very disappointing that the Federation of Small Business has welcomed the Government measures but we must remember that most small businesses do not belong to the FSB.”

Phil Hall, AAT Head of Public Affairs & Public Policy, concluded: “Small businesses appear to be less than impressed with Government action in this area.

“Let’s not forget that 73% of MPs back all three AAT recommendations to solve this problem and that the construction, finance, fashion and recruitment industries have united around our proposals for big companies to sign the Prompt Payment Code, pay businesses within 30 days and face substantial fines if they persistently fail to do so.

“Government needs to urgently go back to the drawing board, look at the broad consensus for meaningful change and think again.”

AAT has made a set of prompt payment recommendations to the Government, which are:

• For any organisation employing more than 250 people to be compelled to sign the Prompt Payment Code
• For maximum payment terms under the Prompt Payment Code to be halved from 60 to 30 days
• For persistent late payers to be fined by the Small Business Commissioner

Other BCM findings:

Business confidence still negative

Another key finding from the ICAWE’s BCM was that business confidence is still negative this quarter, at -10.3, although this is higher than it was in Q2 2019, where it was at -16.6.

However, whereas in Q2 confidence was trending upwards, within Q3 it has trended downwards, impacted by both national and global events.

British Steel’s insolvency and the announcement of the closure of Ford’s Bridgend plant, as well as evidence of a global slowdown and international political anxieties, particularly with regard to Iran were all cited as reasons for the downturn in business confidence.

This trend has reversed gains that were seen after Article 50 was extended in April, and confidence levels are almost as low as they were following the EU referendum in 2016.

From: ICAEWBusiness confidence was found to be negative in every sector, but particularly in Retail & Wholesale, Property, and Transport & Storage.

Confidence among SMEs is not as negative at with FTSE 350 companies and foreign-quoted companies, due to larger and international companies more exposed to global factors such as trade wars and protectionism.

GDP growth likely to be weak in Q2 and Q3 of 2019

The BCM’s Confidence index suggests that the UK could see growth of only 0.1% in Q2 and 0.2% in Q3.

Preparations for a ‘no-deal’ Brexit on 31^st March caused a boost In Q1 as businesses increased their stocks, but any growth in the rest of 2019 looks likely to be limited.

There is potential for an improvement in consumer and business confidence following recent announcements of increased government spending and possible tax cuts. However, there is no plan for these to be implemented immediately.

Meanwhile, the new Brexit deadline of 31^st October is looming creating the possibility of a ‘no deal’ or a general election, or both, and uncertainty is set to continue for some time.

Notes from the ICAEW on the Business Confidence Monitor:

The Business Confidence Monitor (BCM) survey began in 2003.

1,000 Chartered Accountants responded to a telephone survey between 22 April 2019 –  19 July 2019. Businesses were categorised in terms of size (no. of employees), region and industry sector. Regional classification used was ONS Government Office Regions.

The BCM survey covers over 1% of economic activity both for the UK as a whole and for different UK regions. This assures our data captures accurately the mood of UK senior business professionals.

Business Confidence Index methodology – The Business Confidence Index is calculated from the responses to the following:

“Overall, how would you describe your confidence in the economic prospects facing your business over the next 12 months, compared to the previous 12 months?”

A score was applied to each response as shown below, and an average score calculated:

Using this method, a Confidence Index of +100 would indicate that all survey respondents were much more confident about future prospects, while -100 would indicate that all survey respondents were much less confident about future prospects.

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