Breaking the vicious cycle of late payment (Part I & II)

accawebmaster —  12 March 2012 — Leave a comment

By Manos Schizas, senior policy adviser, ACCA

Part I: Great Expectations

If you’ve been following enterprise news over the last week, you will know that Enterprise Minister, Mark Prisk MP, held a late payment workshop last Thursday at the Department for Business, Innovation and Skills (BIS), where, among other things, ACCA launched the research report, Getting Paid: Lessons for and from SMEs.

Joining us at the workshop were representatives from the Federation of Small Business, the Forum of Private Business, the Institute of Chartered Accountants in England and Whales (ICAEW) and the Institute of Credit Management (ICM), as well as officials from BIS. But perhaps most intriguing was the presence of the Cabinet Office’s Behavioural Unit – the people in charge of assessing whether behavioural ‘nudges’ can be used instead of regulations to improve outcomes for society and the economy. If this comes to mind, I don’t blame you, but there was a good reason for them to be there. 

You see, while waiting at the BIS lobby, the ICM’s Philip King, the Institute’s Clive Lewis and I talked about how many times our organisations had all been there before – a meeting at 1 Victoria Street, to discuss prompt payment. We were slightly worried that this time around only the names had changed. We were all there back in 2008, when BIS was called the Department for Business, Enterprise and Regulatory Reform (BERR), and the Prompt Payment Code was launched to the satisfaction of all participants. Just as we were all there back in 1998, when BIS was the Department for Trade and Industry (DTI) and the new Labour government launched the Late Payment of Commercial Debts regulation, which gave small businesses the right to charge a penalty rate to late payers. Needless to say, we were all there when the regulation was revised in 2002 too.

But regardless of everyone’s enthusiastic support, none of these measures proved to be a silver bullet. Between 1997 and 2007, the late payment problem barely budged. And of course it didn’t get much better in the recession. Fifteen years after Government first decided to tackle the problem head-on, there’s an inescapable feeling that we must be doing something wrong or we wouldn’t keep meeting right back where we started from.

Part II: Of Hammers and Nails

The many businesses that have signed up to the Prompt Payment Code deserve recognition, and so do our longtime partners, the ICM, for administering it. The Code itself is important, not because it has the power to dictate long term payment policies to large corporates (I’ll be surprised if it does), but because it provides a benchmark for what is good practice and what is poor practice. Without that neither government nor the private sector can begin to hold anyone to account. Similarly, the UK’s late payment regulations as well as the EU Directive on its way in 2013 are worthwhile; not because they can deter late payers, but because they put meat on the bones of governments’ denunciations of late payment and give small suppliers a little additional bargaining power – small comfort perhaps to those who feel they have been mistreated by powerful customers, but a useful tool if used correctly.

But ultimately, as Mark Prisk acknowledged from the outset of the meeting, it is not realistic for governments to expect to outlaw late payment. Imagine trying to outlaw unauthorised overdrafts for consumers – then imagine consumers being able to access them for free because they are individually powerful enough to impose their terms on banks. Science fiction, of course, but it should give you an idea of the impossibility of the task. Regulation is a much more useful tool when it comes to non-payment, and indeed businesses only seem to make use of their legal rights when a customer proves to be so unreliable, or so close to failure, that it’s best to just cut their losses and collect what they can.

Knowing that this is not news to any of us, the minister then asked the only truly relevant question in this policy area: what can government influence? Short of regulating the entire informal market for trade credit – a task that would defeat even the most crushingly authoritarian state – government can only exert control over the payment patterns of its own agencies; its suppliers, who would not be willing to risk being excluded from the public procurement market; and the most visible listed firms – say, the FTSE100. This may not sound like much, but the ensuing culture change can be profound – the supply chains of these organisations are substantial.

The government’s partners can also co-ordinate their messages, guidance and products to drive a gradual culture change. Building behavioural cues into ERP systems, organising at the community level, naming and shaming (an old favourite but not nearly past its sell-by date), or even educating business owners in credit management; all good points that we were all keen to examine.

Most of these we have tried already. The ICM, for instance, offers its excellent Managing Cashflow Guides. As part of BIS’ Getting Paid on Time campaign, ACCA published Get Paid!, our guide for owners and managers of small businesses, in collaboration with the ICM and the Forum of Private Business. Others have prepared their own resources for their members. But there’s only so much we can achieve by focusing on the weaker party in cases of late payment – and we are likely to be accused of blaming the victim in any case, by pointing out the SME sector’s frankly disappointing track record in credit management, invoicing and collection (more here and here).

So we return to the original question: what tools do we have, short of regulation, for steering powerful customers in the right direction? As they say, if all you have is a hammer, everything looks like a nail.

Parts III & IV will follow later this week…


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