Last month the shocking impact that poor payment practices have on small business owners was revealed in a survey which found 92% of respondents facing problems as a result. Jackie Biswell examines how late payment practices can be stamped out.
You have done the work, provided the service, supplied the goods, but you’re still waiting for the money to drop into your account.
Doesn’t sound fair, does it?
And yet a study in December by engineering services trade bodies ECA and BESA found two-thirds of construction business owners were regularly paid late with nearly half taking no salary at all to make up for shortfalls.
According to the findings, one in four had to cancel company training, one in five were unable to replace broken equipment and one in three struggled to pay business taxes.
Alarmingly, 7% of employers were forced to pay their staff late and nine in 10 business owners suffer from a range of mental health issues, including anxiety and depression, as a direct result of the stress of managing cash flow.
While the statistics paint a bleak picture, many of us won’t be surprised in the slightest. After all, we are all aware of the slow payer ethic which is commonplace in our industry.
Why does it happen?
The problem often arises when big firms contract smaller ones. All contractors would prefer to be paid within a month of invoicing but, when dealing with large companies, they are rarely able to argue if they don’t like the terms on offer, lack the resources to chase payments and are concerned about a possible backlash if they complain.
Sadly, many large firms demand 60-day payment terms. What’s worse, almost 20% of specialist building contractors admit to paying between 60 and 90 days after invoices have been received and some admit to pushing this beyond 120 days.
Protracted terms and delayed payments allow big firms to use the money to improve their own cash flow, bank-roll investments or inflate balance sheets at year-end.
Some companies even pride themselves on how long they can delay settling bills, using internal KPIs to track performance.
However, the result on contractors and sub-contractors – which represent the backbone of our economy – can be catastrophic.
There have been many attempts to change the status quo. In 2008 the Prompt Payment Code was established to help small suppliers recover the £30.2 billion owed to them by some of the UK’s largest companies.
But a decade on, while still in place, this is not the resounding success it was supposed to be.
Currently, it is estimated that in the UK alone around £13 billion is owed to small businesses in overdue payments and up to 50,000 businesses are at risk of insolvency every year because they lack the reserves of larger organisations to cover such delays.
This is an enormous problem which explains why trade organisations representing smaller businesses are liaising with each other all the time to find new ways to combat problems.
Most recently, the Federation of Small Businesses (FSB), a UK membership organisation representing smaller firms, started to work with the World Trade Organisation to ensure small businesses were not adversely affected by bad practice. And new rules designed to make sure large government suppliers pay their bills to their own suppliers on time – first announced by the Cabinet Office in November 2018 – came into force on 1 September 2019.
As a result, big businesses must now pay 95% of their invoices in 60 days or run the risk of being excluded from bidding for major government deals. And this is starting to make an impact on businesses who do not want to be cut out of the most lucrative contracts.
A culture change
Under the Reporting on Payment Practices and Performance Regulations 2017, large suppliers are now required to publish their payment performance data online every six months – with false reports a criminal offence that could incur a fine.
But other practical measures that some companies have started adopting include companies holding money in things like ‘project bank accounts’ – used in construction to receive payment in five days or less from the due date. And many are also using commercial bank cards to pay suppliers earlier than agreed terms, while still improving working capital.
We are starting to make strides in the right direction but whether large or small, we all play a role in ensuring the abuse of retention payments within the construction industry is stamped out.
After all, small and medium-sized businesses are vital to the health of our economy, providing jobs and prosperity to communities up and down the country. We need them to flourish and have a duty to ensure they do so.