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The pervasive problem of late payments.
By Alison Maitland
It can start with the online equivalent of a blank look. “What invoice?” the client emails back when you inquire about your overdue payment. You groan. This is going to be another long haul.
Sometimes the excuses are subtler. “We have a complex new payments process, but we are working on it” or, “It’s in the system, but it has not yet been authorized.” No timing is given, and the details are sketchy enough to cover payment any time from next week to never.
Late payment is a serious problem for many businesses, and it is getting worse. A report this summer by BACS, the U.K. automated-payment-schemes body, found that small businesses were owed a record £35.3 billion, an increase of nearly £2 billion from six months earlier. What’s more, companies now have to wait on average for nearly thirty days longer than the agreed payment terms.
Big businesses are the worst culprits, the survey found. As a recent victim myself, this is certainly my experience. The bigger the company is, the longer the wait for payment. I’ve suffered delays as long as eighty days, and I know businesses that have waited even longer. My promptest debtor is a small nonprofit organization that manages to make bank transfers in a day—something that, astonishingly, eludes the army of payment processors in some multinational companies.
The record on late payments varies from country to country, indicating that this kind of bad behavior is more acceptable in some cultures than in others. Only twenty-four out of a random sample of 104 businesses around the world said that their U.S. customers paid them on time, according to a recent survey by the Finance, Credit and International Business Association. Most respondents experienced delays of up to thirty days beyond their agreed terms, with some waiting up to sixty days.
In Western Europe, Scandinavia has the best record; southern countries place worst. Only around 20 percent of domestic business-to-business invoices are settled late in Denmark and Sweden, half as many as in Italy and Greece, according to the Atradius Payment Practices Barometer. The worst-affected sectors are manufacturing and wholesale/retail/distribution.
It seems that many countries, including the United Kingdom and the United States, have a “late payments culture” to add to the “compensation culture” and the “entitlement culture” that have disfigured chunks of the business world in recent years. The Federation of Small Businesses, a U.K. lobby organization, says that six in ten of its members routinely deal with late payments by larger private-sector customers.
This is bad for businesses at the receiving end, and bad for economies as a whole. Extrapolate what’s happening to individual firms across the whole economy, and you can envisage the damage done when companies are unable to expand or, worse, are forced into liquidation as cash flow dries up. Ultimately, it can backfire on big-business customers because they end up with fewer suppliers, who can then command higher prices and are in stronger positions to dictate their terms.
However, this is more than a purely financial issue. It is also an ethical issue. At its most basic, paying on time is about being honest and sticking to an agreement. Too many companies have forgotten that. They go through the motions of requesting terms and conditions from their suppliers, only to ignore them in cavalier fashion.
“The ethical side is where it all starts,” says Charles Wilson, chairman and managing director of Lovetts, a U.K. law firm that specializes in recovering commercial debts. “Finance directors think they’re doing a good job for their company by delaying payment and increasing their working capital at someone else’s expense.”
Wilson blames short-termism for the problem, comparing business attitudes in Britain unfavorably with the “much longer-term” approach he sees in Scandinavian businesses. He believes that the problem could be resolved if boardrooms made a stand on the principle of prompt payment. Over the longer term, Wilson says, poor treatment of suppliers will come back to bite the perpetrators, just as bad treatment of employees does.
“The ethical issue is about who companies value most,” says Oonagh Harpur, a London-based corporate consultant on strategy, reputation, and governance. “They are not valuing their relationship with their suppliers as highly as they value a little bit more money for themselves. The consequence is that when you need your supplier to help you out in a crisis, he may not be so inclined to do so.”
A leading design agency I know refused to do any further work for a major retail company after it had to wait a whole year to receive full payment for a completed contract. This was particularly frustrating, as the retailer was reporting record profits at the time. For several years afterward, the retail group was unable to access some of the best designers in the business. Eventually, after many requests, the agency agreed to do some new work for the retailer, but only on condition that it was paid for each completed stage. This took some negotiating, but the agency stuck to its guns. It was a victory for the smaller supplier, demonstrating that large companies can be flexible if they want to be—or are forced to be.
When finance departments hold up payments, they are also damaging valuable relationships between other parts of the business and their suppliers. What has been lost here is recognition that suppliers are real people, who also have bills to pay. Those suppliers may be one and the same as their customers, yet many businesses fall over themselves to satisfy their customers and avoid negative publicity, while treating their suppliers with disdain.
The business world already has a mountain to climb to restore public trust, as I pointed out in my last column. The time, expense, and frustration involved in chasing late payments are not reflected in the raw data, yet they can lead to a big loss of faith. What are all those claims of corporate social responsibility worth when a company is grinding its suppliers into the ground?
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