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Pegasus Blog

Why Cash Flow Needs More Than a Prompt Payment Code

DATE

March 31, 2015


The recent news that large businesses are still paying late is unlikely to come as much of a surprise to the 5.2 million SMEs it affects

With the average SME owed around £38,186 and many expressing concerns that if this figure was to increase to £50,000 they’d risk bankruptcy, the scale of the late payment problem doesn’t look like it’s going away any time soon. And given that SMEs account for more than 99% of private UK businesses, it doesn’t take an economist to work out that this poses a potential threat to the current growth we are seeing.

So the measures to bolster the Prompt Payment Code (PPC) outlined last month by Business Minister Matt Hancock, were welcomed pretty much across the board. These measures, which stipulate a 60 day limit on payment of invoices, after which the company will be ‘blackballed’ from the PPC, and require companies working in the public sector supply chain to lead by example, are designed to encourage best practice.

But in our view the late payment culture that we seem to accept as the norm these days, can only be tackled if political agendas are reinforced by practices undertaken by SMEs themselves. In fact one of our biggest concerns about the PPC is that it risks creating a false sense of security, whereby SMEs step down their own efforts to tackle late payments, safe in the knowledge that it is being addressed at a higher level. 

 Few issues threaten the financial stability of SMEs as much as cash flow. Yet we are genuinely surprised at how many organisations still view it as something which is outside of their control, and therefore cease to take steps to reduce its impact.

 As a company which works with many thousands of SMEs, we see first-hand the frustrations and ramifications it creates. Those organisations which take our advice, and implement a few simple steps to strengthen credit management capabilities, achieve a substantial reduction in debt levels. This might take the form of automating many levels of debt correspondence, reinforcing letters with e-mails, or workflow to flag debtor days before they spiral out of control.

So while the new measures in the PPC clearly represent a positive shift, as we see it, in isolation, they are simply not enough. We strongly believe that SMEs have to take responsibility to ensure they are doing everything within their power to add rigour to their credit management and speed up payments.

This approach, supported by the PPC, stands to create a more stable balance sheet and reduce the level of supplier risk which is currently endemic across industry.


To learn more about Opera 3’s Credit Management Centre contact us on 0800 919 704 .