Despite efforts by the small business minister and others, late payment is raised frequently in business surveys as a matter that materially affects an organisation's growth and stability. Late payment however has a number of connotations that go beyond the simple matter of cash flow.
Late payment, and its stablemate, bad debt, are problems that can debilitate businesses large and small. It can particularly affect businesses that are going for rapid scale up and high-growth who are too ‘immature’ to secure lines of credit yet are expanding commensurately towards their potential.
The law is unequivocal: there are penalties for organisations that fail to settle invoices within the allotted time. This is typically a defined percentage above the bank base rate. The problem is that for so many businesses, it is not a solution for two reasons. Firstly, it compounds the problem of achieving payment anyway. Secondly despite being a legal entitlement, it can sour the ongoing relationship with customers in the context of lifetime value. Late payment penalties are therefore used rarely if at all.
All behaviour is indicative of attitudes, values, beliefs and practices that occur within organisations. Late payment is no less an indicator. At best, it can indicate poor system priorities, at worst it can indicate a lack of values, poor financial circumstances and low integrity. In many businesses, this neglect can also be accompanied by a somewhat penny-pinching approach to relationships with the supply-side leading to the feelings of a ‘oneway’ relationship.
Business confidence is materially affected by how a business manages its financial affairs. Outside of due diligence procedures and the inspection of annual accounts, the day-to-day experience of an organisation is in great part gained in the way it manages money in relation to others. Businesses with challenging cash flows, or those in de facto financial difficulty, rather than actively manage these issues, often create an alternative line of credit by effectively displacing their financial deficits into their supply chain so that suppliers’, subcontractors et cetera, start carrying the burden. The effect is a chain reaction across businesses where even the most integral business can become fiscally stressed by third parties. The antidote of course is to have very clear terms and conditions and to declare boundaries fairly early on in the contractual process. This is not always as easy as it seems in the Realpolitik of gaining business. Larger companies, for example, will often contract with smaller companies on a 90-day credit cycle, creating an inbuilt cash flow issue for those companies with the only option being they refuse the work, a measure that can preclude contracting with larger entities. Anyone involved in this knows 1001 ways this whole thing can unravel. Worst of all, is where a company unscrupulously simply sees its liabilities as transmissible to its customers and supply chains. This can lead to the scenario where someone “pops” the company, leaving a trail of destruction behind in otherwise successful entities and losing consumer confidence.
Financial integrity within a business and a vigorous approach to both managing cash flow, honouring liabilities and credit control is essential in a modern business environment. It is perhaps time that a cultural shift is affected where it becomes an expectation that late payment levies are the norm to ensure the necessary rigour of approach amongst organisations and to separate the wheat from the chaff before things become too problematic. No board should leave it to their financial director to understand how the organisation transacts with the outside world. A properly informed approach forms part of the relational space between the organisation and the wider community and the price of failure in this respect is not always instantly recognisable but ultimately high in terms of credibility, brand values and even jobs.
Meantime, there are many things that businesses can do to avoid being caught in the credit chain. Due diligence with suppliers and customers is essential, clear terms and conditions are important, as well as robust debt recovery approaches that makes sure that any amount owed is kept a priority for debtors. Clear contractual frameworks and where necessary, relevant credit insurance may also be a viable option. The important thing is the days of handshakes, especially in a small business world are pretty much a thing of the past for those who want to prosper, rather than just get through and without focused attention on these issues, survival is simply not guaranteed.
I remember being taught that there is no business decision that is not a financial decision, a business mantra that could well benefit many organisations. We live in a world where increasingly some see sound finance as an inconvenient adjunct to the creativity, vision and self-actualisation fostered in upbeat and optimistic business environments. The truth is that bottom line considerations must never be lost sight of and are neglected at the organisation’s peril!
