What costs the economy £2.5 billion and is responsible for the premature closure of 50,000 potentially viable businesses each year? Well, it’s not poor productivity or a lack of investment as some might suspect: it’s actually late payments. That’s the conclusion of the Federation of Small Businesses in its recently published dossier – ‘Time to act: the economic impact of poor payment practice.’
So what exactly did the FSB report discover? Well, it found that SMEs were disproportionately disadvantaged by late payment practice in comparison to larger enterprises: what’s more, it discovered that the problem was, if anything, getting worse. 30 per cent of SME payments were, on average, typically late in 2015/16, compared to 28 per cent in 2011. It also discovered the repercussions of these late payments can be devastating for some businesses; with 37 per cent of small firms encountering cash flow problems, 30 per cent being forced to use an overdraft to compensate for the lack of funds and 20 per cent stating that profits were adversely affected by late payments.
In conclusion the FSB report states that if payments had been made on time as agreed in 2014, 50,000 businesses would not have been forced to close their doors, and that would have boosted the UK economy by roughly £2.5 billion.
Speaking at the report’s launch, Mike Cherry, National Chairman of the FSB said:
“Uniquely, the UK now risks having a business culture where it is acceptable not to pay SMEs on time. Based on an imbalance of power between large companies and their small suppliers, this now has a chilling effect right across the economy.”
“It’s distressing to hear from our members that in 2016 the average value of each late payment now stands at £6,142. Small businesses have to run a tight ship with their cash flow, and as they struggle with increasing business costs on one hand and an uncertain domestic economy on the other.”
“They should not also have to struggle with the stress, time and money required to chase overdue payments from corporate giants,” he added.
So how does the FSB think the problem can be solved? Well, it has put forward a plan to improve payment practice, at the core of which is a proposal to make the company boards of bigger companies accountable for the impact their chosen payment strategy has on their suppliers. In addition, it has called on the Government to devote some of its impending Corporate Governance drive to ‘supply chain respect’, alongside measures on executive pay and workers. The FSB also wants the accelerated appointment of a Small Business Commissioner to champion the SME community and challenge chain supply chain bullying:
“This new evidence demonstrates why it’s so important, from both an ethical and an economic point of view, to address this issue head on. Payment culture is set at board level and supplier interest must be represented at the top of the chain. It’s something that CEOs and board members in big businesses must take responsibility for,” Mr Cherry said.
“Big businesses should respect the supply chain and stop using smaller businesses as a credit line by delaying payments and applying bullying tactics,” he added.