Managing Late Payments – Why Knowledge is Power

It’s official: with 2.6% growth last year, the UK economy expanded at its fastest rate since 2007. As the green shoots of economic recovery turn into something more tangible, small and medium-sized enterprises (SMEs) could be forgiven for looking forward to conditions being a little easier in 2015.

There’s nothing wrong with adopting a sunnier outlook, but cautious optimism is perhaps the best approach when it comes to the day-to-day management of accounts. Late payments can still prove problematic in managing cash flow and investing for future growth.

The UK’s Prompt Payment Code was established in 2008 to drive a change in the culture of payments. Experian’s research shows that last year, businesses with more than 500 employees typically settled bills almost three days faster than in 2008; however there are still no guarantees that a supplier will always pay up as and when expected. Poor payment versus the desire to acquire new customers often proves to be one of the biggest headaches for SMEs.

An Improving Record

Conditions are, nonetheless, improving in the UK and Republic of Ireland. Experian’s data shows that last year, businesses settled bills an average of 23.16 days beyond terms, or 1.66 days quicker than in 2013. Indeed, 2014 was actually the best year for businesses paying bills since 2008, when the recession began – yet another indicator for businesses that conditions are improving.

This is particularly true for the UK’s 2.2m SMEs, which are actually leading the way in this regard. Survey findings show that companies with 10 employees or fewer have demonstrated the greatest improvement over the past year, with sole traders settling 2.35 days quicker year-on-year (YoY) and those with two to five employees improving by 2.72 days. At the larger end of the scale, enterprises – those with more than 500 employees – paid bills an average of 33.16 days beyond terms on last year, an improvement of 1.11 days on 2013’s 33.16 days beyond terms.

Companies in the Republic of Ireland also improved, with Irish businesses paying more than five days quicker in the third quarter of 2014 compared to Q3 of 2013.

Overall, this provides good news for SMEs, which are looking to improve cash flow to invest for future growth as well as providing stability to safeguard against the bad debts that can often lead to insolvency.

International Trading can be Challenging

While conditions might be improving in the UK, it’s also important to ensure checks on late payments are in place when trading overseas. Growth and expansion for a business of any size can be both an exciting and daunting prospect. In days past, one would have typically associated an international footprint with larger enterprises. Today, with improvements in global trade agreements, government support through advice and funding and developments in technology, the environment for SMEs to look beyond British borders to the global marketplace is a very real business opportunity.

While the Prompt Payment Code originated in the UK, international businesses can also be signatories where they have any dealings with any UK company. There is also a wealth of information easily available such as the World Bank Group’s annual ‘Ease of Doing Business Index’, which assesses various factors in 189 global economies including how easy it is to set up a business and trade across borders.

That said, SMEs do not seem to be conducting the same business practices abroad as they would normally in the UK, particularly when it comes to credit checks and information about late payments.

Experian’s own analysis of the SMEs in the UK to understand their aspirations for international expansion revealed 85% of those that operate internationally do not check the credit history of potential overseas customers or suppliers to verify whether a company is in fact reputable. This includes a company’s history around late payments. In fact, 56% of SMEs trading overseas assess businesses through relationship building alone.

Forty-seven per cent report that they gauge a business’ reputation by visiting its website, with 36% checking its customer references and credentials. One in four of the UK’s SMEs rely simply on undertaking desk research to compare a business with its competitors and understanding whether it is reputable to deal with.

So while many countries have varying payment practices and it can sometimes be difficult to expedite payment if the culture doesn’t necessarily encourage it, treasury and finance departments still need to do the necessary checks up front. As markets open up and trading across borders increases, it is imperative that UK SMEs manage risk appropriately and perhaps be more stringent around their due diligence than they might be at home if they want to ensure prompt payment.

Taking Action to Safeguard your Business

There are, however, several measures that SMEs can take to minimise risk. Late payments are often an early indicator of financial woes at a company, so on-going monitoring will help reduce the risk of losses. More than half of UK SMEs check their customers’ credit ratings only once a year – not often enough to identify potential problems.

Setting up alerts on the company’s customers in both the UK and overseas can give treasury all the information it needs. It’s just as important to review the credit position and payment performance of the company’s existing customers as it is for new ones. If a business starts to show signs of a deteriorating financial position it may become necessary to reduce the level of credit given, adjust payment terms or ask for a deposit upfront.

There are many factors to consider when doing business both at home and abroad. For SMEs, the opportunity should far outweigh the risk – meaning the world really can be your oyster if you take the right steps upfront. Doing research diligently and speaking to people who have experience in international markets can be hugely beneficial and ensure positive cash flow is a certainty rather than a possibility.


For further articles on the issue of late payments, click here.


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