By Kurt Cavano, founder and chief strategy officer at GT Nexus
With the new Late Payment Regulation due to come into effect in April 2016, finance directors across the UK may already be feeling rife with trepidation. Following on from the European Late Payment Directive (2011), the new regulation will require UK businesses to publish information about their payment practices twice a year. While it may not entirely eliminate late payments nor term extensions, it will serve to create a ‘name and shame’ game that could, ultimately, come to bear quite heavily on a company’s reputation.
In the past, the UK has taken many steps to instill ethical payment culture in business. For one, it created the Prompt Payment Code (PPC), an initiative that encourages businesses to volunteer to be held accountable to the Code's payment practices, including 30 day payment terms (with an absolute maximum of 60 days). However, while the PPC is voluntary, the new reporting legislation is not. A recent government action plan on strengthening UK manufacturing supply chains, found that the overall level of late payment owed to SMBs in the country as of January 2015 stands at £32.4 billion – this situation cannot continue.
Last year we heard many reports about the practice of "supply chain bullying". While playground antics such as name calling, pushing, shoving, and inappropriate jokes spring to mind initially, in fact, this term refers to small suppliers being bullied by corporate customers and, in some cases, subject to some very unfair dealings. According to a survey by the Federation of Small Businesses, almost one in five companies said they faced some form of supply chain bullying in the past two years, including long payment terms and retrospective discounting.
With the new regulation, however, large businesses will be required to publish information about their payment practices in a central location and, by doing so, will give suppliers more information about what to expect before entering into contracts. This will also make it easier for consumers to see which companies have the most "ethical" payment policies. Though we’re still waiting for the exact terms, it is expected that companies will be required to report on:
• their standard payment terms (including any changes that have been made to them since the last reporting period);
• the average time taken to pay;
• the proportion of invoices paid in 30 days or less, paid between 30 days and 60 days; and paid beyond 60 days;
• the amount of late payment interest owed and paid;
• any financial incentives required of suppliers before they can join or remain on supplier lists;
• whether they are a member of any industry codes of practice relating to payment; and
• dispute resolution processes, availability of e-invoicing and access to supply chain finance.
It’s fair to say that some companies may be challenged by the new law – they likely pay late for a reason, potentially lacking the tools to process and pay on time. Indeed, the right tools are necessary for not just invoicing but the whole process for procurement to payment. On the other hand, those that continue to bully suppliers will rightly pay a price. Not just in the form of higher cost of goods due to capital-related costs, but with track records and payment policies on display for all to see they will find themselves under close scrutiny by regulators and customers alike. No company today wants to risk a bad grade for sustainability or responsibility and nobody will want to be profiled as a late payment bully – especially when we know there is another way.
Indeed, we know already, for example, that early payment programmes often create win-win situations. Buyers agree to pay suppliers early – sometimes in as little as seven days – in exchange for discounts on their invoices. Many buyers actually see this as a form of investment; one that often produces higher returns than banks. Buyers can actually invest in their suppliers, either by partnering with financial institutions or by self-funding and offering competitive rates while earning returns on capital higher than a typical money market fund. In exchange, the buyers not only ensure the reliability of their supply chain, but they can also offer performance incentives based on metrics that they value.
Ultimately, technology has an essential role to play in helping businesses meet regulation requirements. Cases where late or unreliable payment is the direct result of ineffective systems are all too common. Having an open, collaborative platform to facilitate communication among the various partners in the supply chain network is the key to solving these cases. Having such a platform in place not only automates accounts payable (AP) and the procure-to-pay process, but ensures accurate, prompt and fair payment – without which some suppliers would end up out of business or without the upfront capital necessary to finance future operations.
As much as culture drives technology, technology also drives culture. The efforts of the UK legislation only highlight the need for buyers and suppliers to be able to connect with one another on more meaningful levels, in flexible and easy ways.