By Manos Schizas, senior economic analyst, ACCA
Late payment is, as I’ve written before (here and here), a significant problem for small businesses in the UK, indeed in many of ACCA’s major markets. For years successive UK governments have chiselled away at the problem with an array of tools but made relatively little progress.
Hence, it was encouraging to hear that the UK government is consulting on ways of reducing the incidence of late payment to SMEs. The government, we are told, will ask for views on (among other things):
- How it can encourage greater responsibility for payment policies at senior management and board level
- How it can make clear which firms are good payers and which aren’t
- Whether there is a case for further legislation or penalties for firms which pay late.
Aren’t we forgetting something?
ACCA agrees with the PM that it is important that the Government signal in very clear terms that prompt payment is a significant element of corporate citizenship. Until last month, one of the ways it did so was to require that companies provide information on their record of prompt payment to suppliers.
I say ‘until last month’ because the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, which came into effect on 1 October, effectively scrapped this obligation; a change that has been two years in the making.
In September 2011, the UK Government launched a consultation on the future of narrative reporting in the UK. One of the proposals, inspired by a commitment to regulatory reform, was to scrap the prompt payment reporting requirement. BIS’ laconic justification reads as follows:
“Successive governments have attached a great deal of importance to prompt payment to creditors by business. However, we understand that the information this requirement provides is not considered useful for either creditors or shareholders so are removing this requirement.”
Now, I don’t doubt the outcome of the consultation was as reported by BIS. I’ve seen for myself responses from other influential stakeholders that ‘warmly welcome’ the removal of such ‘superfluous’ disclosures. I can say, however, that ACCA certainly did not share the majority view. In our response to the consultation, we argued that
Companies should continue to be subject to a requirement to disclose their policies and practices on payment of creditors. […] We would agree that the existing disclosure requirement does not appear to have impacted on the prevalence of the problem. But the ineffectiveness of the disclosure requirement can […] be attributed at least in part to the ease with which figures can be smoothed and to the absence of any sanction for non-disclosure. If the current requirement were to be removed, this would we fear send an unwelcome signal to companies that late payment is no longer seen as an important issue of public policy. […] Rather than abolish the disclosure requirement, therefore, it would be better to revisit the current requirement and refocus it so as to require the disclosure of more meaningful information.
Useful in principle
Long payment terms and late payment are, at the end of the day, cheap ways of ensuring liquidity. Investors, creditors, even a company’s own staff may benefit from them. But they may also want to know how much liquidity the company can draw on in this way; the amount is not infinite, and for a business plan to assume it is, is a major risk. It’s a matter of understanding the business model and its vulnerabilities. In a credit crunch, even small suppliers will become stricter creditors, as ACCA and CBI research has demonstrated. Some could fail altogether. An over-reliance on informal liquidity for the actual financing of the business could, in fact, signal trouble ahead.
Moreover, investors, creditors and other stakeholders might well want to know whether the company’s bargaining power vis-a-vis suppliers is endangered by its payment policies. If the company is forcing its suppliers to underperform in the long term, they could refuse to do business with it in future. Alternatively, they or their assets could end up being acquired by their competitors. Either way, the remaining suppliers’ bargaining power would increase substantially, eating into the company’s profits. Why would anyone not want to know about this risk? Again, it’s a matter of assessing the viability of the business model.
The fact that a rather poor tool for delivering this valuable information did not seem to work does not mean stakeholders should forever give up on the information itself. This is a running theme whenever narrative reporting is discussed, and the solution is pursuing more integrated reporting, not giving up altogether.
I hope the UK Government’s consultation will provide an opportunity to reopen the discussion on this basis.