Want to Reduce Late Payments? Here Are Two Ways
- By Jordan Novak
- Published: 12/10/2015
In the United States, the federal government’s successful QuickPay initiative requires federal agencies to pay small business contractors and subcontractors within 15 days. Following QuickPay was the SupplierPay program, a public and private sector partnership designed to encourage large companies to pay their suppliers more promptly. After just over a year, the program lists 47 participating large buyers that have pledged to pay their suppliers faster, but that number represents a small percentage of large U.S. corporates.
The Prompt Payment Code is an industry-led, voluntary program in the UK administered by the Chartered Institute of Credit Management on behalf of the Department for Business Innovation & Skills. Its signatories agree to a maximum 60-day payment term, with a goal of establishing a 30-day term as standard practice. It’s been in effect since 2008, but a 2015 report from the Asset Based Finance Association (ABFA) found that late payments owed to small and medium-sized businesses in the UK have still increased by more than a third over the past four years.
The European Late Payment Directive, launched in the European Union in 2013, recommends maximum payment periods of 60 days for companies and 30 days for public authorities. The European Payment report referenced earlier found that only about a third of businesses in the EU say they are familiar with the directive and as few as 6 percent say they have seen a positive effect from it.
In a novel effort to reduce late payments, organizations have taken to public shaming. In the UK, the Forum of Private Business, which represents small business, has established a “Hall of Shame” listing late payers. Around the world, companies known for chronic late payment are often called out in the media.
With the exception of the mandatory QuickPay program, most of the government initiatives mentioned earlier depend mainly on public visibility to ensure compliance. In most cases, participating companies who are found to have violated the terms of the agreements face few consequences other than being removed from the program rolls.
Economic consequences of delayed and extended payments
While it’s true that extending days payable outstanding (DPO) improves a company’s balance sheet, it’s detrimental to both buyers and suppliers in the long run. A November 2015 article in The Guardian referenced the trillions of dollars, pounds, euros and yen sitting inactive on company balance sheets while economies around the world suffer from lack of liquidity.
This is compounded by the fact that regulatory responses to the financial crisis including Basel III have made it difficult or impossible for smaller companies like the ones that comprise many corporates’ supplier bases to borrow at reasonable rates to sustain their business—assuming they are able to borrow at all.
Cash-starved suppliers are a risk to the supply chain. “Our suppliers face the same challenges that we do with their suppliers: everyone needs their cash flow quicker,” said Ed Spitaletta, president of New Jersey-based Storemaxx. “Having steady cash flow and being able to pay our suppliers promptly grows our capacity to distribute and sell products. It’s simple mathematics.”
Thinking long-term is the key to working out the disconnect between buyers’ desire to extend DPO and suppliers’ need for quicker cash flow. It makes a difference when large companies work with their suppliers to find solutions to improve their supply chain health and the economy at large.
Jordan Novak is managing director at C2FO.
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