Large businesses taking longer to pay bills as COVID cash crisis begins to bite

The average time it took large businesses to pay supplier invoices lengthened by two days in Q3 in a sign that the COVID-19 cash crisis is beginning to bite, new analysis from accountancy and business advisory firm BDO has shown.

BDO’s quarterly Payment Performance Tracker, which analyses the payment practices of large UK companies, has revealed that the average time it took to pay suppliers rose to 35 days in Q3 2020, up from 33 days in Q3 2019.

Meanwhile, the proportion of invoices not paid within agreed terms rose to 29%, up from 26% in the same period last year.

Since 2017, large businesses (generating two or more of annual revenues in excess of £36m, a balance sheet value over £18m, or more than 250 employees) have been legally required to publicly report on their payment practices and performance every six months.

The latest data for Q3 shows a 23% year-on-year drop in the number of reports posted on time on the Government portal. While this may be due in part to key staff being absent through furlough or sickness, the lower number of reports may also be blurring the real picture of payment performance.

BDO has warned that the recent deterioration in payment processing times risks getting worse in the New Year, impacting the cash flow of suppliers and threatening the survival of some small firms.

The hospitality, retail and manufacturing industries were among the sectors recording the biggest declines in payment performance. The average time it took hospitality businesses to pay jumped from 38.5 days in Q3 2019 to 46.7 in Q3 2020, while retailers climbed from 39.1 to 43.8 days and manufacturers rose from 44.6 to 46.1 days.

Conversely, payment performance by public sector bodies showed signs of improvement with the average percentage of invoices not paid within agreed terms dropping from 23.2% in Q3 2019 to 19.8% in Q3 2020. This was likely due to new procurement guidance issued in March which directed contracting authorities to pay all suppliers as quickly as possible to maintain cash flow and protect jobs.

The Government has recently taken further action to try and address the issue of late and unfair payment practices. In October 2020, the Small Business Minister launched a consultation on giving greater powers to the Small Business Commissioner (SBC) to order businesses to pay in good time and to issue fines if they fail to do so. The SBC is also seeking to strengthen the Prompt Payment Code (PPC) under which signatories would commit to pay 95% of invoices from smaller businesses within 30 days. Currently they agree to pay all suppliers within 60 days.

Tim Foster, a risk advisory partner at accountancy and business advisory firm BDO said:

“COVID-19 is clearly placing great strain on cash flow and we are beginning to see the first evidence that larger businesses are taking longer to pay their bills. Unfortunately, delays at the top of the supply chain can trickle down to SMEs and in some cases threaten their survival.

“The Government estimates that there is over £23 billion worth of late payments currently owed to small businesses in the UK. With many businesses unable to trade and the prospect of national or local lockdowns being extended, the problem of late payments could become more acute as we go into next year.

“Larger businesses can often struggle to pay promptly because of complex internal processes. However, there is arguably a moral obligation on those with adequate cash reserves to play fair and pay their smaller suppliers promptly. Many could do more to improve their working capital management, and adopt a more collaborative approach in order to prevent a culture of late payments being passed down the supply chain.

“Government initiatives to encourage fair payment practices have helped small and medium sized businesses, but we’ve recently seen a drop in compliance. This suggests that either compliance activity has been pushed down the list of priorities since the pandemic hit, that actual payment performance may be worse than reported, or both.

“Where SMEs can do more to help themselves is by researching their customers’ payment performance on the Government portal, making sure they send their invoices in promptly, and checking that there are no errors as disputes can often lead to delays in payment processing times.”

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