Reading between the lines

Payment practice reports will help SMEs enter new business relationships with their eyes wide open, writes Philip King

Reading between the lines

One of the principal tasks, of the professional credit manager, is to steer their business away from the risk of non-payment. This would include all of the usual reference points: Financial reports, credit checks, looking at Companies House data, as well as media reports, and sharing experiences with others in the industry.

Spare a thought, therefore, for those suppliers to Carillion, many of who could not have possibly known what was about to unfold. Even for the credit professionals that did, and had managed their exposure down, they were no doubt still surprised by the suddenness and drama of its implosion. If the chairman, managing director and former finance director are to be believed, then what hope is there for the rest?

Payment data is, of course, a useful barometer, and there has been much hysterical reporting about Carillion’s payment record. But data alone does not always tell the whole story, and this has been brought home to me recently in studying a report by Graydon, produced exclusively for CICM.

The report is an analysis of figures from the first firms obliged to meet the new payment practices reporting regulations, introduced last year, that oblige larger firms with a ‘Duty to Report’ their payment performance. The first tranche, which includes such names as Stagecoach Services, Center Parcs, and The Carphone Warehouse, had to report by November 30 2017.

This data suggested that more than a quarter of all invoices are being paid late: The average reported time to pay was around 39 days with just over half (52 percent) paid within 30 days. A third (33 percent) were paid between 31 and 60 days, and 15 percent were paid later than 60 days. The most troubling statistic, however, is that more than a quarter (27 percent) were paid beyond the agreed terms.

This snapshot suggests some alarming trends. The biggest issue for many SMEs is not the length of payment terms but the certainty that payment will arrive when they expect it. Often, payment of a large supplier, the rent, or the wages are dependent on a large invoice being paid.

If more than a quarter of invoices are being paid late then the suppliers are seeing a hole in their cashflow which is worrying, at best, and can be catastrophic. For many small businesses, it’s about more than just the balance sitting in the current account.

But before we rush to condemn certain companies on the list, take heed: These figures do not always tell the whole story. One company, for example, reports that zero invoices are paid late – which must be a good sign – yet the average time to pay is 69 days, and only seven percent of invoices are paid within 30 days, which is far less encouraging. Its maximum contractual payment terms are 75 days.

Contrast that figure with another company that reports paying 57 percent of invoices outside the agreed terms, yet 52 percent within 30 days, 28 percent between 31 and 60 days, and 20 percent in more than 60 days. Its average time to pay is 56 days.

Which company is the better bet? How you interpret these figures is dependent on your point of view and what is most important to you. It is easy to draw conclusions that might be misleading – both good and bad. Sometimes you need to read between the lines.

The new government portal, where individuals can search for published payment practice reports, should help SMEs adopt best-practice credit management and get a more informed picture of who they are doing business with.

You can go into the relationship with your eyes open and, if the terms being sought are out of line with those reported, you will have good reason to push back and ask why you are being treated less favourably.