In March this year, the UK’s then business minister Matthew Hancock announced that come April 2016, the UK government will require large businesses to report the details of their payment practices to the public.
The following metrics will be on record for public view:
- Payment terms.
- Average time taken to pay.
- Proportion of invoices paid beyond agreed terms.
- Proportion of invoices paid under 30 days, between 31 and 60 days, and beyond 60 days.
- Any late payment interest owed and paid.
This latest measure is part of the UK’s ongoing effort to create a culture of prompt and ethical payment. Currently, many small and medium suppliers both in the UK and around the world suffer from delayed payments. Large businesses often take advantage of their size and leverage to avoid paying promptly, since it essentially gives them a free line of credit. However, this practice devastates suppliers, who are stretched thin and often left with no cash to pay their bills.
In the past, the UK has taken other steps to instill an ethical payment culture in business. In December 2008 it created the Prompt Payment Code, an initiative that encourages businesses to volunteer to be held accountable to the Code’s payment practices, including 30 day payment terms (with an absolute maximum of 60 days). The Code includes a Compliance Board that monitors signatories’ behaviours. It also has a way for suppliers to issue challenges against signatories. If a company is found guilty of violating the Code, it is removed from the group.
While the Prompt Payment Code is voluntary, the new reporting legislation is not. The expectation is that it will shame large companies into adopting a more ethical payment culture.
Late Payment and the Supplier Squeeze
Late payment is a form of “supply chain bullying”, which is any instance where one party in the supply chain exploits others to its absolute advantage. Typically, it involves a large buyer using market advantage to furnish favourable terms for themself at the expense of their suppliers. In addition to late payment, other “bullying” tactics include “pay-to-stay” deals. This is where buyers force suppliers to pay a fee or ‘investment’ to guarantee a continuing business relationship – a practice, some might say, that is not dissimilar to blackmail.
All of this is a losing game. Exploiting your own supply chain will cause it to collapse. Supply chain relationships are mutually dependent. The culture of pounding suppliers for short-term advantage might be all too common, but it’s unsustainable in the long run, and doesn’t nurture growth.
Capital costs for small suppliers – needed for factory space, materials and machinery – can be significant, particularly for those in emerging regions. Suppliers who don’t get paid promptly cannot pay their bills, let alone grow. That’s to the detriment of buyers, because it impacts the quality of goods, their reliability, and deliverability. The Prompt Payment Code and the new reporting requirement are ways of putting public pressure on companies to consider their own supply chain health.
The good news is that many prominent companies already understand the importance of building constructive and collaborative relationships with their suppliers. The problem is, even where they have the will, they don’t always have the systems in place to ensure prompt and fair payment.
Making Payment Foolproof
Cases where late or unreliable payment is the direct result of ineffective systems are common. Communication technology is the key to solving these cases. In order for the complex invoice/payment process to become automated, there needs to be communication technology that’s designed with supply chain interactions in mind. A technology platform seeking to automate accounts payable (APs), or the procure-to-pay process could ensure accurate, prompt, and fair payment, as long as it’s built for collaboration and transaction-automation between trading partners and financial institutions.
A successful automation effort can insert liquidity and speed up processes for all parties involved. It can also create new business models that help both buyer and supplier forge a strong supply chain.
Early payment programmes, for example, create win-win situations. Buyers agree to pay suppliers early – sometimes in as little as seven days – in exchange for discounts on their invoices. Many buyers actually see this as a form of investment; one that often produces higher returns than banks. Buyers can actually invest in their suppliers, either by partnering with financial institutions or by self-funding and offering better rates to cover capital costs than banks. In exchange, the buyers not only ensure the reliability of their supply chain, but they can also offer performance incentives based on metrics that they value.
The veteran clothing label Levi Strauss & Co., for instance, partnered with the International Finance Corporation (IFC) to offer low-cost financing to its suppliers who conformed to their terms of engagement sustainability score. The better the score, the better the rates.
Automating payment with the right technology can create all sorts of new, lucrative, collaborative possibilities across the supply chain. As much as culture drives technology, technology also drives culture. The efforts of the UK legislation only highlight the need for buyers and suppliers to be able to connect with one another on more meaningful levels, in flexible and easy ways. The culture of payment is changing; technology needs to change along with it.
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