Late payment

As regular readers of this blog will know, I have emphasised the vital issue of cashflow to many small firms during the current credit crunch, and the importance of public sector bodies paying their bills as soon possible .

To be fair, many local authorities are doing their best to facilitate this and whilst one of the best councils at settling in bills in 2007-2008 was Conwy, Monmouthshire County Council were less than impressive in their response according to the data from the WLGA.

Certainly, there should be an immediate response to ensure that officials in Monmouthshire brings the council up to the Welsh average payment period as soon as possible as there is little excuse for this, especially when it is critical for all public bodies to do their best to help small firms.

However, this issue is not just limited to public bodies and the largest problem for small firms is getting paid from other businesses, particularly larger ones.

Late payment has been one of the key problems identified by those managing a small business for many years. To deal with this, the UK Government introduced the Late Payment of Commercial Debts Act which gave small firms the statutory right to charge interest on all outstanding debts.

As a result of this legislation, it was envisaged that this problem would be largely eliminated. However, many small firms have been reluctant to charge interest on outstanding debts owed by larger firms because of the impact this could have on their relationship with their bigger partner who may not renew a contract with a ‘troublesome’ supplier.

And the situation is getting worse.

Recent research by the Federation of Small Businesses has shown that some large businesses are taking up to 100 days to settle many outstanding invoices and, at any one time, it is estimated that there are over 17,000 firms at risk of closure, with small firms owed more than £11 billion.

Worse still, the incomes of around 3.4 million people are at risk of delay every month as small firms are put in a position of being unable to pay their own workers on time with a real knock on effect for the economy.

Indeed, it has been estimated that over half of small businesses say they are owed more money by customers than they owe to suppliers, with micro-businesses with a turnover of under £50,000 per annum suffering the most and having to fund the resulting cash shortfalls with overdrafts and credit cards.

To top it all, large firms are also demanding discounts from small firms if bills are paid on time.

Of course, this issue was not a problem at a time when banks were happy to let small firms have extended overdraft limits which enabled them to be flexible over payments from customers. However, with banks tightening their own lending criteria, the situation for small firms will undoubtedly get worse unless action is taken to solve this problem.

The question is whether the UK government should penalise large firms to attempt to rectify this problem as the current legislation is not working?

Certainly, with the economy slowing down, it would be expected that payment terms will become even more onerous to small firms as larger businesses, in order to protect their own profits, pass the cash problem onto their small suppliers. This will be most prevalent within the retail sector, which is expected to be hardest hit by any recession as consumer spending grinds to a halt.

So, driven by the immediacy of getting cash into businesses, perhaps the time has come for politicians, who regularly call small firms the backbone of the economy, to finally ensure that entrepreneurs are treated fairly by their larger customers.

As I said at the beginning of this article, it is also important for the public sector to continue its efforts to ensure that bills from small firms are settled quickly.

Yesterday, the Welsh Assembly Government stated at its second 'economic summit' that it would increase the proportion of payments made within 10 days, of which the first step will be to work to ensure that the 30 day target is met consistently by the Welsh public sector.

I hope that this promise has already been implemented by civil servants and that small firms are beginning to get the cash they need to survive this credit crunch (especially as I know of at least one business that is still waiting for a WAG bill to be paid over 50 days after sending in the invoice).

Popular posts from this blog

THE IMPORTANT IMPACT OF STARTUPS ON THE WELSH ECONOMY

THE IMPORTANCE OF FRANCHISING

UNIVERSITIES NEED TO BE AT THE HEART OF THE ECONOMIC RENAISSANCE OF THE WELSH ECONOMY