The Prompt Payment Code
by Jo Shaer, on December 19, 2013
Further to my post on late payment problems, I read an article in the FSB's Network Magazine by Philip King, the Chief Executive of the Institute of Credit Management (ICM) about why prompt payment can actually benefit both businesses.
He reminds us that 10 per cent of all business failures can be attributed to non-payment and 20 per cent are the result of the failure of a trading partner. Allowing too much debt to build up between your business and a major partner can be disastrous and it is vital to ensure that greater focus is placed on credit management to try to limit the amount of cash that is tied up in unpaid invoices.
Whilst most media coverage - and indeed my own experience - has been to moan about the poor treatment of SMEs by larger customers, it has to be remembered that even the big boys have their own fragile supply chain to protect and it is not always wise to pay up too quickly and risk that.
Why it's good to pay on time
For one thing, it builds up a culture of trust. If I get an invoice from a contractor or outsourcer, I always pay it promptly. I don't like to leave them lying around in case I have a senior moment and forget altogether. But, that way, the supplier knows when to expect my payments and if, for some unforeseen reason, the payment does not arrive, they know it will be a technical issue or an oversight.
Knowing that my clients are going to show me the same courtesy and pay on time makes me more likely to offer discounts and give them preferential treatment because it tends to promote confidence about both their financial well-being and the respect that they show me. It makes me more secure about doing business with them.
The Prompt Payment Code
With the Department for Business Innovation and Skills (BIS), the ICM have developed the Prompt Payment Code (PPC) which is a "simple statement of clear and consistent policy between customer and supplier. Through this pledge, companies commit to paying invoices on time, giving clear guidance to suppliers and encouraging good practice throughout the business community."
The PPC also allows suppliers to raise concerns about late payers, although it is not clear whether this is like a sort of blacklist.
SMEs also have access to practical help through a series of online Managing Cash Flow Guides which can be downloaded here. Since their launch two years ago, almost 400,000 have been downloaded.
The cheque is in the post
But what to do about that perennial excuse and get the cash into your account?
Peter Wallwork, the Chief Executive of the Credit Services Association (CSA) advises that you should always get details of the cheque in question but that a better option is to insist on payment by BACS transfer or a card payment of an outstanding invoice since this can then be settled immediately with a better chance of payment.
He comments that many people find it difficult to pick up the phone and ask to be paid for a product or service we have delivered and have a right to be paid for. And he's right. I absolutely hate this aspect of my job.
When we do pluck up the courage to make the call, we are almost happy to be fobbed off with the usual excuses and delaying tactics which, in many cases, are just a way of allowing the other business to obtain an even longer term of credit than the 30 days already agreed.
Mr Wallwork advises that oustanding invoices should be followed up immediately and confirmation gained that the invoice has been received, that the details are correct and that there is no reason why the amount should not be paid. The you should ask when you can expect the invoice to be paid.
However, even with the best credit management strategies in place, some debts can still require the services of a collector. With statistics showing that at the end of September 2012, over £1.145b had been outsourced to such agencies, Mr Wallwork says that employing a third party Debt Collection Agency (DCA) to recover a debt should not be seen as a failure on our part but a natural extension to a small business's credit management process.
How can you protect against bad debts?
Find out as much as you can about your customers before you supply any goods or services - many businesses do not even do basic checks and it could be enlightening about whether or not you should be considering working with them.
Have a full set of terms and conditions and make sure that these are agreed by both parties - this will save a lot of trouble in the future.