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We need to talk about bad behaviour

Everyone is talking about the budget. It’s big and bold and the devil is in the detail. I’m still working through it and getting hundreds of insightful emails from experts in all sorts of sectors talking about what it means for their businesses. All I can say for sure is there’s a range of opinions.

The budget aside, as always, I’ve been discussing payments. I had a very insightful afternoon with accountants, running their own small firms in the main, at the ICAEW (Institute of Chartered Accountants England and Wales,) about the payments experiences of the small businesses they work with.

One of those accountants shared the following data with me gathered from his clients. It’s a small sample and a survey rather than in-depth research but it rings true:

  • 90% of companies have a 30-day credit policy.
  • 65% of companies on average received their payments late. 73% of respondents who have a 30-day credit policy received their payments on average within 45 days.
  • 59% of companies extended their credit policy to win a large customer.
  • 84% of companies have a late penalty clause in their contract.
  • 9% of companies who have a late penalty clause actually use this in practice.
  • 18% of companies offer a discount for prompt payment.
  • 45% of companies confirmed they required additional working capital due to late payments.
  • 48% of companies who required additional working capital delayed payment to their own suppliers.

What does this tell us? I’m not an analyst and haven’t been able to talk to these business owners to ask why, why, why. But at first glance it seems to me there’s some pretty poor payment practices out there and some bad behaviour on the part of customers of small suppliers.

Why agree to 30 days credit terms and then ignore that agreement? If you know you can’t pay in 30 then say so and let the supplier decide whether or not to supply you. If you do agree to pay in 30 days, that’s a contract. You can’t just say ‘oh, I delayed paying you because I hadn’t been paid myself’. If you make an agreement you should pay up even if you have to borrow in order to keep the deal. You can’t use your supplier as a bank.

If you aren’t waiting to be paid, then perhaps your tardiness is down to poor processes? If your processes don’t support payment in 30 don’t agree to it. That’s duplicitous and misleading.

It also looks to me as if the small suppliers are paying to get paid: with discounts for prompt payment, borrowing costs so they can keep the business ticking over, accepting longer credit terms for bigger contracts. Why should suppliers be pushed into allowing you to keep their money for longer in order to win the work? That’s you misusing your greater power. Why should the supplier have to borrow because you’re using them as a bank? Pay on time and if necessary, borrow and cover the borrowing costs. And above all why should the supplier have to reduce their own margins to give you a discount when you agreed to the terms in the first place?

However, all this cuts two ways. If you’re the one waiting to be paid and paying your own suppliers late, you’re simply passing the bad behaviour down the chain. You’ve made contracts with your own suppliers, and you need to pay them on time even if you haven’t been paid on time. You have to find the money from somewhere and pay the costs, not your supplier.

We’ve all got businesses to run, families to feed, bills and wages to pay and all of this bad behaviour is just making things worse, for everyone. It’s also contributing to mental health problems. Don’t agree payment terms you know you can’t keep. Don’t assume you can just renege on a contract and hold onto suppliers’ money if you’re paid late. Make sure you have contingency plans in place so you can pay on time. Technology is wonderful and using up to date apps and software will help you pay on time and get paid on time. Make sure your processes don’t take an inordinate length of time. There’s something seriously wrong it you need a 20-point approval process. And if people don’t stick to the contract refuse to work with them again. I accept that’s easier said than done if you need the work and future work, but the time and resources used up in chasing payments that are overdue could be used to find new customers who pay well.

I can already hear the howls of ‘it’s much more complicated than that’. Some of the biggest firms in the UK with hundreds of thousands and even millions of invoices a year have managed to improve their payment performance and treat their suppliers well. They’ve saved money as a result and build better relationships with suppliers. The topic is being discussed everywhere I go including by the Chancellor in her budget. This isn’t going away. Pay quick and fair. #EveryoneBenefits.