Show Me The Money

All small businesses are exposed to the risk of slow or even no payments from clients. When you are a service business like mine, very often it is prudent to insist on upfront charges or faster payment. But sometimes, no matter what the contract says, if a large client pays late, there is little you can do but grin and bear it.

The inequity of the system is brutal as very often the very client who withholds money on you, is a company who has a cash business at the front end.

Large Companies Can Be The Biggest Sinners

I recently highlighted the problem showed in the Panorma Show where Boots plc had unilaterally, without warning, changed the payment terms for its suppliers.

I have experienced the same but without the courtesy of a letter - it just happened.

For most small businesses, while it would be great to actually slap a writ on a client, in practice it is not possible to get too heavy. A large client is, after all, providing a source of revenue and profit. However, this month things changed for me, when my largest current customer held payment on invoices dating back to before Christmas and has paid only the smallest invoices as a show of good faith which merely covered expenses not fees since. Having crossed the boundary of VAT due dates, I have now paid all the VAT on those invoices and without any cash in, so salary costs to my contractors and myself have been delayed.

However unacceptable I may think this is, and there have been plenty of urgent communications to get this sorted out, in reality I cannot get too angry and throw my toys out of the pram as they have shown in the past that they eventually pay, their credit rating is good and they are one of the lucky companies who are enjoying growth in recessionary times. It is the sort of client I can ill-afford to be without.

I suppose I should just thank the Lord my business is not dependent on the Public Sector who, despite the rhetoric of Mr. Brown, are the worst payers in business by a long chalk.

The Prompt Payment Code

The new Prompt Payment Code (PPC) was devised in and introduced in December last year. Any company can sign up to it and it is purely voluntary with no recourse in law - usual rules apply. Signatories sign up undertake to:

1. Pay Suppliers on time - within agreed terms at the outset of the contract, without attempting to change payment terms retrospectively and without changing practice or length of payment for smaller companies on unreasonable grounds.
2. Give clear guidance to Suppliers - by providing them with clear and easily accessible guidance on payment procedures and ensuring there is a system for dealing with complaints and disputes, which is communicated to Suppliers. Suppliers must be advised promptly if there is any reason why an invoice will not be paid within agreed terms.
3. Encourage good practice - by requesting that lead suppliers encourage adoption of the code throughout their own supply chains.

The PPC is being monitored by a festoon of organisations like the Institute of Credit Management, the Federation of Small Businesses and the Forum of Private Business. Sadly, none of these organisations have any real teeth and none have good membership from larger companies. The trouble often with such initiatives is that they look good on paper but because you do not have to buy in and cooperation of large businesses or Government Departments, then it is likely to fall by the wayside.

Our Worst Nightmare

I have been doing a lot of business in Italy of late and the one thing that strikes you is how businesses survive over there. Credit terms are generally understood to be 60 days at the very minimum but are often at least 90 days and more like 120 days and yet more with Government Departments regularly taking 6-9 months to pay bills. This, of course, has a massive ripple effect as it cascades through the supply chain. You might think that correspondingly prices are higher in Italy to compensate for this but the reality is the opposite - if anything, competition is more keen.

For companies entering the Italian market, if at all possible, do so via a partnership or Distribution and just make sure they are financially solid enough to manage your market on your behalf, even if that costs some extra discount as is likely.

Britain, in my opinion, is fast becoming the same way. Large firms are using suppliers as a source of credit as banks are not so easy with their money any more.

Spin And Guff

Professor Nick Wilson of Credit Management Research Centre at Leeds University believes the PPC is just PR spin both from the Government and the signatories and it has all been seen before. There have been similar attempts at codes in the past but Government did not get behind it and impose its rules - Government even withdrew funding for the Better Payment Practice Group which really said it all.

Wilson agrees with me - in his opinion, the situation has worsened considerably for smaller businesses over the last 10 years.

Your Rights

In 1998, the Late Payment of Commercial Debts (Interest) Act gave small businesses a statutory right to interest on money owed to them by large companies or the public sector and to claim debt recovery costs. However, it is a case of cutting off your nose to spite your face as few companies resort to the law for fear of losing their clients' business.

It is a real Catch 22 situation.

Naturally, when the rights were extended to big businesses, they had no problems enforcing it. For many smaller businesses, it means they are getting squeezed at both ends - larger suppliers giving them aggressive payment terms which they are penalised heavily for if they transgress while large companies refuse to hold to their payment terms who are their customers.

Also, a case in question is VAT payments. In the case when a large customer has not paid on time and you cross a VAT quarterly boundary, and if a large supplier has held off paying for 60 to 90 days, you can end up paying all the VAT without money coming in. The Government sees only you and not your customer, who they are happy in the same quarter to reimburse the exact same VAT you have charged them.

The system is a complete mess and penalises the company that has not been paid.

In reality, there is little that can be done about the situation. SMEs are right in the middle and we make up over 90% of the volume of companies in this country and account for 13m employees yet we have a minor say in how the process should run and no voice when it comes to large company customers and Government not paying.

Companies Signing The PPC

Notable companies like Asda, British Gas and John Lewis have signed the PPC code had little to say when contacted on the subject and this bears out Wilson's PR spin accusation. It's all for show. Asda, for one, has actually implemented some good schemes to help. They have won awards for their supplier schemes and 'Where's My Invoice?' is one which allows suppliers to go online and track their invoice through the Asda payment system to be able to tackle issues which may delay payment as and when they occur not when the money is overdue.

Real Experiences

The large customer I refer to has not signed the PPC and is not interested in doing so. Just this morning in answer to my latest protestations, an accounts clerk has asked me to send a Statement of Account, then having denied receiving it despite a read-alert warning telling me they had not only received it but read it, they then claimed they had not received any of the invoices despite me having read-receipts for them all.

Of course, calling them liars does not help the situation and may well jeopardise future business, but I don't think this is at all unusual for small businesses. We are at the mercy of the system and until Government actually puts their money where their mouth is on this issue like cleaning up the VAT payment scams, then we will always be at the bottom of the food chain.

I hope Lord Mandelson gets to read my blog - his ears should be burning at least!