Small businesses are being left struggling for cash as more than a quarter of all invoices are being paid late by large firms, says a new report by the Chartered Institute of Credit Management.

Large corporates extending their days payables outstanding (DPO) to improve their internal cash flow, and maybe to boost stock prices, are having a dramatic negative effect on smaller suppliers.

More than a quarter (27.26%) of UK firms are being paid beyond agreed terms, potentially leaving them struggling for cash. The figures, published by the Chartered Institute of Credit Management (CICM) are drawn from the new Reporting on Payment Practices and Performance Regulations that imposes on large companies a ‘Duty to Report’ their payment performance.

Uncertainty is the killer

A key issue for many SMEs is not the length of payment terms per se but the certainty that payment will arrive when expected, commented Philip King, CEO of the CICM. Payment of a large supplier, the rent or wages is often dependent on a large invoice being paid on time. “If more than a quarter of invoices are being paid late, then the suppliers are seeing a hole in their cash flow which is worrying, at best, and can be catastrophic”.

King warns that the Duty to Report figures need to be read carefully. Where one company reported no invoices being paid late, the reality is that its average time to pay is 69 days, with only 7% of its invoices paid within 30 days, the firm deploying a maximum contractual payment term of 75 days.

Better but still bad

According to records released last year by Bacs Payment Schemes, SMEs are owed a total of £14bn by customers. This is a significant improvement on the £30.3bn figure five years ago but still represents a potentially damaging cash shortfall.

The Bacs report said more than a third of the UK’s 1.7 million payments to SMEs are often prolonged way beyond agreed terms. Around 30% of companies face delays of at least a month beyond their terms and nearly 20% have to wait more than 60 days before being paid.

The Bacs research also showed that, as a result of delays, 16% of SMEs find it difficult to pay staff on time and most spend around four hours a week chasing late payment. Around 20% of small businesses face bankruptcy if they are owed between £20,000 and £50,000, with 7% saying they are in the danger zone.

Demanding answers

Half-yearly payment practice reports for large UK corporates will soon be mandatory for all large companies in the UK. The current tranche was filed in November 2017.

All submissions can be searched on the government database. As long as the numbers are read with care, King says it should help SMEs get a more informed picture of who they are doing business with.

“They can go into the relationship with their eyes open and, if the terms being sought are out of line with those reported, they will have good reason to push back and ask why they are being treated less favourably.”

Some large corporates recognise the problems that working capital efficiency programmes can cause and have put in place measures to help their smaller suppliers. This case study from Adam Smith Awards winner, Samsonite, shows that positive outcomes can be achieved when extending DPO.

Next week we open up this concerning issue, taking a country-level look some of the world’s worst offenders for late payments.