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How do YOU care about LATE PAYMENTS? Should you really care?

At the UK ACT’s annual working capital management conference on 4 December the last session by Philip King, CEO, Chartered Institute of Credit Management on Late payment – who cares? was one of the most important. King and the CICM are the main drivers behind the UK government’s Prompt Payment Code which aims to:

  1. Pay suppliers on time
    • Within the terms agreed at the outset of the contract
    • Without attempting to change payment terms retrospectively
    • Without changing practise on length of payment for smaller companies on unreasonable grounds
  2. Give clear guidance to suppliers
    • Provide suppliers with clear and easily accessible guidance on payment procedures
    • Ensuring there is a system for dealing with complaints and disputes which is communicated to suppliers
    • Advising them promptly if there is any reason why an invoice will not be paid to the agreed terms
  3. Encourage good practice
    • By requesting that lead suppliers encourage the adoption of the code throughout their own supply chains.

[Additionally, signatories undertake to pay suppliers within a maximum of 60 days*  (in line with late payment legislation requirements), to work towards adopting 30 days as the norm, and to avoid any practices that adversely affect the supply chain.

*Paying invoices within 60 days is a requirement (this is met by paying 95% of invoices within this period)]

What was really interesting and important was his description of the key drivers on late payments for each of the parties.

SMEs

The key drivers for SMEs are:

  1. The certainty of payment, i.e. when the buyer says it will be paid on 1st of the month, they can be absolutely sure the monies will arrive in the account on that date. This uncertainty drives small suppliers ‘mad’ as the payment is about paying the mortgage, etc.
  2. Length of payment terms, obviously 30 days is better than 60 days
  3. 120 days payment terms (and sometimes longer) are mostly, but not always, unacceptable
  4. Do not want to expose the large companies that pay them late (so only some 20 challenges under Prompt Payment Code/year)
  5. Now more challenges in last year than in the previous five because there is now a statutory requirement to submit data to the BEIS Payment Practices Reporting portal.

Large MNCs

For large MNCs the key drivers are:

  1. Desperate to avoid being ‘named and shamed’ in public for late payment and will change processes and terms to avoid being exposed
  2. Need warning before being exposed
  3. Will submit an action plan to become PPC compliant and ‘get them back on track’ ASAP 
  4. Don’t like being excluded from the PPC compliant list as then not an attractive company to supply to as supplies are now looking at these PPC reports.

Government

For governments the key drivers are:

  1. Protecting SMEs viability
  2. Simple legislation and company reporting which is why there is no distinction in the reports required from large companies as to how they pay their large suppliers and how pay SMEs. (But according to King this could change in the future.)
  3. Starting to NOT to issue contracts to suppliers who don’t meet the PPC standards.

Impact of Prompt Payment Code

The PPCode has impacted all sorts of areas including:

  • rather than getting excluded from the PPCode list of members, companies are setting up Action Plans to comply with the code
  • Payment run dates brought back earlier to ensure that suppliers are paid on time
  • Increased use of p-card for smaller transactions
  • Streamlined approval processes with the number of signatories reduced for low-value items
  • Companies have changed their contract terms
  • Payment system processes have been reviewed and changed
  • Mediation between buyers and suppliers
  • Use of chat boxes and portals for suppliers to find out what is happening to their invoice(s)
  • Education of suppliers as to what is required to ‘get paid’, e.g. correct PO number, and send the invoice to the correct department, etc.
  • Company boards are now interested because directors have to sign their report on how they pay their suppliers (It is a criminal offence not to report)
  • PPC reports are now being used as part of credit assessments.

King believes that the main contribution of the PPCode is that it has generated a level of debate on late payments that were not present before.

The Future

CTMfile asked King whether he is optimistic about Late Payments continuing to decrease. He responded, “Yes I am optimistic about the improving landscape for payments. All the political parties have referenced Late Payment in their various manifestos, which clearly shows the subject has moved up the agenda. There has also been a renewed focus on the Prompt Payment Code, with many of those who were previously suspended devising action plans to improve their treatment of suppliers. My optimism has to be tempered with realism; there is no silver bullet and a multi-faceted approach is needed. There will always be firms who abuse their supplier relationships, and lack of professional credit management and poor practice in managing cash flow is also a challenge. Conversely, further investment in professional credit management can have a significant impact on enhancing a company's performance and profitability."


CTMfile take: CICM is to be congratulated on the Prompt Payment Code because it has brought the late payment issue into the public view and raised the level of debate and attention enormously. Sadly, there is still much more to do… It is a never-ending battle.

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This item appears in the following sections:
Inventory Cycle in WCM
Order-to-Cash Cycle in WCM
Procure-to-Pay Cycle in WCM
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