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Late payments are a menace to businesses, innovation, industries, the economy, and society as a whole.

Firstly, late payments have a significant impact on businesses, affecting their cash flow, which is akin to suffocating the business. It affects confidence both from your suppliers and your staff who will start looking around if you can’t pay them.  This is compounded by increased costs of finance and expensive short-term loans, which can cause a ripple effect on the business and its stakeholders, even leading to bankruptcy in some cases.

Secondly, the economy as a whole is impacted by late payments. Unstable employment leads to mental health issues, businesses closing their doors has a huge ripple effect on their suppliers and the value chain they sat in.  It can also affect trust and spoil relationships between businesses, leading to a bad culture of late payments.

Late payments can occur due to various reasons, such as cash flow management, complex payment processes, administrative errors, disputes over goods or services, intentional delay, lack of priority, inadequate payment systems, late payment culture, and anti-corruption legislation, and red tape.

There are many, many reasons so as business owners we need to look not at why these occur but what we can do to mitigate their impact on our businesses.

What can businesses do?

To avoid or manage late payments, businesses must know their industry and understand how value is created for their clients and customers so you know who they are, what can go worng and what their payment reputation is. Only offer services that you clearly understand and can deliver to prevent disputes on services redndered when it comes time to bill and be paid. Also, don’t be greedy – avoid deals that concentrate your risk.

Prevention is always better than cure but sometimes you might find yourself beholden to a delaying client and it’s important to build relationships across big corporations you are supplying to so that you are able to escalate when needed.  

Be clear and concise with terms of service and administration and invoice accurately, per your clients requirements to get in front of the pyment queue. If payment is delayd, be practical and negotiate settlements, and with that lesson learnt, avoid repeating mistakes. If payment seems unlikly, be bold and fight for it if it is a big enough invoice. Nowadays, you can also remind customers of how late payments can affect their ESG rating.

What can government do?

The government also has a role to play in preventing late payments. There are various interventions globally, which fall into various categories, and which can be drawn on to build a framework to support SMEs

1. Legislate it – The Payment Times Reporting Scheme in Australia requires large businesses with an annual turnover of over AUD100 million to report on their payment terms and times for small business suppliers twice a year. Or the The Late Payment Directive in the EU sets out a framework for businesses to ensure prompt payment of invoices.
2.  Change tax policy to a cash rather than an accrual VAT system. This would be a remarkable coup for the small and medium businesses that suffer late payments. Upon issuing an invoice, your cashflow takes a hit. Payments delayed for months in effect rob your business of the cashflow you need to sustain and grow on this basis. A cash based VAT system would alleviate this misery.
3. Punish it – The Late Payment of Commercial Debts (Interest) Act in the UK allows SMEs to charge interest on late payments, as well as claim compensation for the costs of debt recovery.
4. Negotiate it – Prompt Payment Code in the UK is a voluntary code of practice that you might well be able to leverage with Trade Associations that your big client is a member of.
5. Police and enforce it – In 2020, the Grocery Code Adjudicator fined Tesco, UK £7.56 million for “serious breaches” of the Groceries Supply Code of Practice, including delayed payments to suppliers.
   In 2021, the Australian Securities and Investments Commission (ASIC) fined Coles Group AUD5 million for failing to pay suppliers within the required timeframe under the Food and Grocery Code of Conduct.
   In 2020, the French competition authority fined Sanofi EUR3 million for late payment of invoices to its suppliers.

Pavlo discussed this in a recent Money Show podcast.

There is regulation but don’t rely on it. Do your homework, be savvy, don’t be greedy and always operate with enough self doubt to guard the downside when opening the upside of a big customer….