Building a responsible payment culture

Comments from ACCA the Department for Business Innovation & Skills
January 2014




ACCA is pleased that BIS is once again addressing this issue, which is a long-standing source of grievance within the SME sector in particular.

Late payment is not a problem that is unique to the UK nor to any one sector of business. But it is one which amounts to a significant threat to the viability of many smaller businesses because of their dependence on cash flow. Any disruption to that cash flow stands to have a disproportionate impact on any such firm’s viability, with consequential impacts on their employees and trading partners. For this reason late payment should be seen in a wider context than simply the inconvenience of the unpaid supplier.

The focus of the consultation is on developing a culture of considerate payment practice. This in itself is unobjectionable and we support the adoption of meaningful measures to try to achieve this. However, we query whether, given the institutionalised nature of late payment, improvements can be made without a strong regulatory dimension to any new framework of actions. In this light we have been disappointed in the recent past to see the Government deciding to repeal the statutory requirement for public companies to disclose their policies and practices on payment matters in their annual reports: the fact that the disclosure requirement in question was widely disrespected, and no effective regulatory response was forthcoming, gave the impression that the Government’s commitment to enforcing good practice among public companies was not as strong as it could be.

ACCA remains committed to the principle of freedom of contract, but within an environment of transparency and fair dealing. The negotiation of payment terms should be just that, not an imposition of terms, but it is vital that businesses are able to judge clearly the likely impact on their own cashflow of supplying goods or services to another business,

We support the contention in the discussion paper that the issue goes to the heart of corporate responsibility, and believe that this aspect should be given more emphasis in future. Disclosure of payment policies and performance should be seen as a key element of corporate responsibility not least because of the possible consequences of individual companies’ actions for the wider supply chain. Company directors should also be encouraged, and if necessary required, to view their policies and practices regarding payment as being part and parcel of their statutory responsibilities to suppliers and customers under s172 of the Companies Act.   

We welcome the Government’s specific commitment to ensuring that all SMEs involved in the provision of goods and services to the public sector are paid promptly. This will set an excellent example and promises to be of real value to those SMEs who currently work with the public sector and those who may be encouraged to do so in future. 


Specific comments

Q1. Do you agree that failure to issue purchase orders for public contracts in a timely fashion is a problem and has caused delays in payment? What measures could Government introduce to ensure that this does not happen? How could this be achieved simply and effectively?

We agree. Failure to issue Purchase Orders not only causes delays in payment but is also a matter of transparency and auditability for the private and public sectors.  That said, it is easy to overstate the extent to which government bodies pay late – after many years of persistent campaigning and government initiatives, most pay very promptly indeed. Where public sector buyers do pay late, it is usually local authorities, and mandating a particular approach to them can be much less straightforward than a similar initiative for central government.

A recent parliamentary inquiry into the public sector’s adoption of e-invoicing heard that, in Scotland, the threat of inspections by Audit Scotland has proven to be a significant tool for embedding e-procurement in the public sector. The NAO could provide similar leverage in the UK, by checking adherence to processes for dealing with suppliers and raising Purchase Orders.

In 2008-9, the OGC conducted a series of Procurement Capability Reviews which took stock of the ability of government departments and agencies to carry out procurement efficiently and in a compliant manner. This system was replaced by a wave of self-assessments against the PCR framework in 2010, and appears to have since been phased out; however continued assessment is necessary and we hope that such initiatives will be revived as the public sector continues to strive for efficiency savings.


Q2. Do you think any specific changes or measures could be introduced to make it easier for suppliers to complain or charge interest when they are paid late by public authorities? 

There is as sufficient alignment of incentives in this regard; many of the behavioural barriers that make enforcement of such rights difficult when dealing with private sector buyers are less pronounced in the public sector. Of course, the onus is still on public sector buyers to provide information about such processes in a prominent manner.


Q3. Do you agree that more disclosure of company performance on supplier payment would be useful? If so, do you agree that a voluntary framework would be an effective, proportionate response, or should a mandatory framework be introduced?

ACCA has been consistently in favour of a mandatory framework. The (actual) terms of credit are as much part of a transaction as the price at which goods and services are sold, and if a supplier cannot correctly estimate the cost of financing their working capital and securing payment, it may not always be possible to know whether they are in fact making a profit. Moreover, because the social cost of business failures due to cashflow interruptions does not accrue entirely to their owners and customers, trade credit creates a negative externality that can be addressed by government intervention.

We believe that a voluntary framework would not extend the same level of protection, as there are insufficient market incentives for buyers to adopt a voluntary standard of disclosure on this matter. As the discussion paper acknowledges, a mandatory reporting framework was already in place before the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 came into effect on 1 October 2013.

We reiterated our support for a mandatory reporting framework in 2011, when BIS consulted on the future of narrative reporting in the UK. In our response to the consultation, and uniquely among the UK accountancy bodies, 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.

Given that the status quo has since changed, we would see a voluntary framework as a prototype for testing; we would then recommend that it be mandated once it has become accepted as good practice.


Q4. Do you agree that if a new framework were brought in (whether voluntary or otherwise) it should include the elements described above? Should further elements be included?

Since this is to be a voluntary exercise, it would obviously help if the information to be disclosed could be information that investors would find useful in decision making; it would also help if the accompanying guidance could underline that disclosures in the strategic report should aim to explain how the company is complying with its legal obligation to ‘have regard to’ the need to foster the company’s business relationship with suppliers and customers (and that therefore payment policies and practices, where material or outside the norm, should be disclosed).  

Aggressive accounts payable management is typically positively correlated with profitability and a company’s valuation, at least in the short term. There is a risk, therefore, that some investors and creditors would be encouraged to think favourably of late-paying corporates, which is certainly not in the public interest. We believe, however, that investors and creditors would take a dim view of businesses that positively rely on suppliers for liquidity, and government would be able to apply pressure on buyers more effectively if they could highlight how much value they are getting out of long terms of credit.

Ideally, we would like to see reporting on this matter become aligned to the International Integrated Reporting Framework, and in particular to the notion of ‘relationship capital’, which can easily be applied to supplier-buyer relationships.

For more practical purposes, ACCA has considered three possible mechanisms in the context of discussion around this area. Firstly, the introduction of payment times reporting as a liquidity / stress testing mechanism.

This would aim to demonstrate the extent to which the business typically relies on suppliers on long credit terms in order to finance its short-term liabilities, or how it would be affected if long-terms suppliers had to cut credit limits or tighten terms. For the purposes of this reporting, any invoices unpaid after 30 days would fall under ‘long terms’ regardless of whether or not they are currently overdue. The reference to ‘long terms’ is deliberate and important – by making no suggestion that suppliers are being mistreated in any way, or that long terms of credit are illegal or inappropriate in any way, this should encourage voluntary adoption. The business would then have to disclose the amount owed to ‘long terms’ suppliers, as well as the average and maximum amount owed over a financial year, both in absolute amounts and as a share of accounts payable.

A second option would be to introduce an aggregate measure of the value of suppliers’ credit to the company – the cost to the company of maintaining a credit facility equivalent to the suppliers’ credit. Companies should be free to balance this out by demonstrating the value of credit they offer their own customers, but should not be allowed to net the two off.

A final option would be to introduce a standard for reporting on the level of competition within the business’ supply chain and the financial health of its suppliers. For such disclosures to be meaningful to investors, they should have a bearing on the company’s profitability. Consolidation among a company’s suppliers tends to reduce the buyer’s bargaining power, hence any late payers risking consolidation as suppliers abandon them, merge or go out of business would be penalised by investors.  This proposal is very sensitive to reporting conventions, however – a company with a very complex supply chain and a large number of suppliers could easily disguise consolidation.

While ACCA is currently leaning towards the first option as indicative to stakeholders of a business’s approach to payment, and its suppliers, all three options are proposed in the context of a discussion with a view to identifying the best long term solution in the light of all the factors.

We would also recommend that any new code should make the point strongly that company directors should view their payment policies and practices in the context of the statutory responsibility they have to ‘have regard to’ the need to foster their company’s business relationships with customers and suppliers. Compliance with the provisions of a voluntary code should ideally become an indicator that a company has adhered to its responsibilities in this matter. 


Q5. Are there any other measures related to transparency or disclosure that would incentivise companies to ensure that their supplier payments are managed fairly and efficiently?

One key aspect of all the disclosures discussed so far is that they operate on a historical reporting basis, disclosing past practice rather than future intention. As is recognised in the discussion paper, one of the most destructive aspects of late payment can be where terms are subject to significant change at short notice. A business will not necessarily know whether a supplier still adheres to good practice (or has improved where the picture is poor) based on the historical data. However, imposition of a mandatory reporting framework on significantly shorter timescales runs the risk of rapidly imposing administrative burdens out of all proportion to the marginal benefit derived unless very carefully designed. Voluntary reporting is, by definition, only effective where the parties wish to sign up to it, but can operate on a far shorter timescale, even potentially in real time.


Q6. How can the Prompt Payment Code better raise awareness of good practice? Would case studies of how companies manage different stages of the payment cycle be helpful in demonstrating how the Code principles can be applied in practice?

ACCA have long supported the Code as we feel that it provides a crucial benchmark against which other parties can assess the fairness of a buyer’s credit terms. It is important, however, that the Code be updated to include guidance on what might constitute ‘long terms’ of credit – ideally on the basis of a departure from industry norms as opposed to a specific number of days.

The fact that the Code does not require buyers to pay within a set period of time is of course only a pragmatic response to the reality of trade credit, but making no reference to the length of terms also risks unfairly discrediting the Code with suppliers.

Continuity and ownership on the signatory’s side is very important. Major corporates can easily find that they have been signed up to the Code by a CSR manager in the past but have since never revisited it or embedded it into their own policies, or that their commitment is likely to be challenged or overruled by other senior staff.


Q7. Are there any steps that could be taken to encourage more businesses to identify breaches of the Code by signatories?

The current mechanism appears to provide a fair balance between transparency and confidentiality. The fact that all references made have been settled by negotiation can be taken as an indication of its appropriateness.


Q9. Should a new ‘upper tier’ be introduced to the Prompt Payment Code for signatories prepared to agree to more stringent rules?

An upper tier would be acceptable as long as the rules are truly stringent. For the proposal to carry significant benefit it needs to be clearly differentiated as aligning signatories to a ‘gold standard’ of good practice, and effectively (and visibly) policed. Rather than committing businesses to better terms of credit, the ‘upper tier’ could draw instead on the experience of customer service standards in commercial organisations. In particular, a commitment to prompt and generous compensation as well as an effective escalation process for complaints could help buyers truly stand out.


Q10. Should businesses be offered incentives to sign up to an ‘upper tier’ if introduced? What would be an appropriate and effective incentive? 

While we firmly believe that Upper Tier status should be its own moral and commercial reward, one option ACCA has discussed with BIS would be for Government to offer to extend credit on a range of payments due to government to upper tier suppliers against its own superior credit rating. This approach acknowledges the financial incentive behind aggressive accounts payable management, but moves the burden of financing these practices to the party with the lowest financing costs, namely Government, as opposed to SMEs.

Such incentives, of course would need to be designed and managed extremely carefully to ensure the taxpayer is receiving value for money and not underwriting big business with cheap credit. Indeed, we would stress the need to pilot such an approach carefully in order to assess the risks involved.


Q11. What are the barriers to claiming interest on late payment? What could be done to encourage more businesses to claim interest and late payment charges where appropriate and create an environment in which this is considered the norm?

Suppliers typically either do not know about their right to claim interest or fear jeopardising a relationship with a major customer by threatening to use the means the law providers them. Some may also be convinced that the administrative cost to them of enforcing this right will be greater than the amount received by way of compensation.  As a result, they only tend to use this option once the relationship has been written off, in order to ensure they have a legal claim to any remaining assets belonging to the customer.

From the perspective of insolvency practitioners the existing regime of late payment interest can be a valuable mechanism for recovering an extra 8 pence on every pound for the creditors of failed businesses. Although late payment can often be a significant factor in the failure of a business, the linkage is not so close or consistent that any additional penalty should be invoked where the debt is being pursued by an administrator or liquidator. It may be that failure of the business has nothing to do with the late payments, or even that the lateness has arisen because of wider administrative issues at the business which directly caused the failure.


Q12. Do you believe that further penalties payable to creditors would be a useful means of discouraging late payment? If so, how do you think that they could be implemented given suppliers’ inevitable concern not to damage future commercial relationships? Do you have views as to how any such additional penalties should be framed or the level at which they should be set?

While insolvency practitioners, as one of the key users of the late payment interest provisions, may be less concerned with considerations of future commercial relationships, a differentiation in favour of insolvent companies is unlikely to be practicable or proportionate, especially given the differing importance that late payment may have had in causing the insolvency (or indeed the possibility that the factors causing the insolvency were also responsible for the business failing to agree suitable terms or chase payment in accordance with their own policies).

For late payments more generally, some additional level of automatic penalty would ‘concentrate the mind’ on the part of late payers. However, the design of such a mechanism, and its interaction with freedom of contract, would be problematic. Interest, representing the time value of money, is a fundamental element of the commercial landscape. Arbitrary penalties would interrupt the freedom of parties to contract. If set at a universal level then sectoral differences in invoicing practice would result in an unlevel playing field. Conversely, any attempt to link penalties to individual contract terms would result in significant administrative issues.


Q13. Do you see advantages in a third party (which could be Government or another body, such as trade associations) playing a more direct role in the collection of penalties for late payment? If so, how could such a system be implemented effectively given the challenges discussed above?

We would be in favour of an automatic penalty triggered by late payment without the supplier’s initiative and administered immediately without the supplier. In order for such a mechanism to work however, the supplier would have to transmit details of invoices to the third party, both when raised and when settled. Technological advances might make this easier, but there must be concerns about security of confidential commercial information in the creation of any mechanism for transmission of such information.

In this light we believe there is a link to be made to the Department’s separate initiative on Transparency and Trust. That project has considered whether, in the context of the need to increase public confidence in the regulation of business activity, Government agencies and the courts should be able to adopt a more direct role in levying fines and compensation orders in respect of unacceptable business conduct of various kinds. We would encourage the Department to consider the potential for extending the sort of measures under consideration under that other initiative to the issue of late payment. Removing the need for direct involvement on the part of the unpaid seller would be a significant step forward in protecting the interests of those parties.


Q14. Should businesses remain able to agree payment terms that are over 60 days? What impact would a hard limit on payment terms have? How would this affect different sectors?

Yes they should. In an ideal world, ACCA would like to see businesses price and cost credit as though it were a service. However, while SMEs remain unable to do so, we would not be averse to some level of regulation of payment terms. We would not choose a 60-day limit for this, as different industries have more or less standard terms that may differ from this. However, we also note that the Late Payment directive has now created a precedent that would make any limit more lenient than 60 days redundant.


Q15. Under what circumstances do you think that a payment period should be considered to be ‘grossly unfair’ to the supplier? How could this be defined more clearly? Would it be possible to agree one set of principles for all transactions or would differentiated approaches be more appropriate, for instance on a sectoral basis?

Frequently it is not so much the defined payment period itself which gives rise to ‘gross unfairness’ as other terms around the settlement of invoices:

  • Requiring that suppliers waive their rights to statutory credit and other compensation.
  • Reserving the right to amend terms with less than a month’s notice (a month being, according to the SME Finance Monitor, what SMEs consider to be the maximum acceptable time it can take to arrange a banking facility).
  • Making payment contingent on factors unobservable to, and outside the control of, the supplier.
  • Denying the supplier the right to assign the debt.

In terms of actual timings, the only way to define a ‘grossly unfair’ length of terms would be by reference to an industry standard – of which there would have to be very many. For some sectors, this should be possible through the intermediation of trade bodies and associations. However, as a matter of statute such inconsistency would be a very imperfect solution.


Q16. If businesses remain able to agree payment terms over 60 days, should they have to consult with suppliers and state publicly that they are doing so, or publish reasons explaining why? Should this apply to all businesses or only large companies? How would this help or hinder your business?

Anecdotal evidence tends to indicate that where large suppliers do extend their settlement times they justify the approach on the basis of bringing themselves into line with sector norms. Quite apart from the weakness of this as an argument in itself, it also of course represents a disappointing approach towards wider corporate social responsibility issues. Requiring businesses to consult on and publish payment policies would highlight the reality of practice in each sector, and give suppliers an opportunity to voice concerns which may help to foster a more responsible payments culture.

Payment terms are traditionally negotiated on an individual basis, even though in practice the use of standard form terms and inequalities in bargaining power tend to result in uniform application of policies by larger business in respect of their dealings with smaller suppliers. Consultation on an individual basis is likely to suffer from the same issues as current negotiations, and would in addition have significant implications for commercial confidentiality. A broader consultation mechanism allowing for input from representative or trade bodies would allow for greater bargaining power on the part of smaller suppliers. In addition, the interposition of a negotiating intermediary would remove some of the concern about destroying business relationships which currently attends individual negotiations.

Such a broad based and ‘open’ consultation would however run contrary to the wider principles of business contracting, and assessing when to engage the mechanism would be difficult. If a business operated several ‘standard form’ contracts with differing payment conditions on each, would a change to any standard form trigger a consultation period, or would the change need to be universal? It may be for intermediate entities in the supply chain that their revision to terms is forced upon them by changes further up the chain, and immediate action is needed to ensure the financial health of the business. Would there be penalties for failure to observe the consultation process?

As with any reporting requirement, restricting its application to larger businesses will reduce the administrative impact. In addition it is typically larger businesses which are in a position to impose their terms, and are therefore subject to the argument that they should publicly justify their stance. To go beyond such transparency and require formal consultation is likely to impose inappropriate burdens with a significant question mark hanging over the value of such consultations in aggregate. While a consultation with a major supermarket may well have a useful impact for a noticeable number of suppliers, particularly in the light of potential consumer interest in the operations of a household name, for businesses in the next tier down the broader impacts are less likely to be influential.


Q18. What role, if any, could industry or sector bodies play in identifying and promulgating good contractual practices within their sectors and adjudicating on disagreements? Do you see particular sectors as priorities for action? How might Government facilitate this?

Many industry bodies already promote good practice, and in some cases highlight bad practice also. Extending their involvement to include a formal role in arbitration processes would require agreement of both parties to any given contract, and also the allocation of resource by the relevant bodies to adjudicating.

In terms of government facilitation, the creation of a default adjudicator who would step in where industry experts are not available to assist in reconciliations would encourage a perception of mediation as being the norm in disputes. Recourse to an outside party for resolution of disputes would be a further broad encouragement towards a more open and transparent culture around responsible payment practices, but introducing an unrelated third party adjudicator would complicate the picture around authority to act and powers to enforce agreements.


Q19. Do you think that more information on whether companies have a history of late payment would help suppliers negotiate better terms when doing business?

There is a balance to be struck between useful disclosure of relevant information and overwhelming small business with unhelpful detail. As mentioned above, the timeliness of information is as relevant as the content in respect of payment practices. For many smaller businesses the information will in any event make no difference to their actual negotiations, but will simply be a factor in the risk analysis and future cashflow planning. Research by ACCA and the CBI showed that, in 2010, SMEs were likely to rely on up to 4-month old credit information on established customers. The same study also found that, although using more information made business owners more confident about their internal processes, a robust personal relationship with the buyer was the crucial element, resulting in better cash positions and quality of receivables.[1]

Nevertheless, publication of relevant information is an important feature in transparency, and will allow both businesses and other commentators to objectively rate businesses’ performance relative to each other.


Q20. What can businesses, data hosting platforms and Government do to facilitate greater transparency? 

Provision of information is only half the battle. The small businesses who might benefit from it need to be in a position to understand the information, and also to allocate the resource to accessing it in the first place. A wider understanding of the importance of cashflow on the part of small business would in itself drive more businesses to access the information which is already available.


Q21. What prevents small businesses from using technology services to help them with financial management and payment? What could be done to encourage greater take up?

There are a range of factors, ranging from structural issues such as digital exclusion to simpler issues of cost or awareness. Addressing the inability of businesses to use any technology (not just credit management and accounting tools) falls beyond the scope of this discussion, but it is still important to remember that there will for the foreseeable future still be a proportion of UK business which cannot or will not rely on modern technology.

In terms of cost and awareness, small businesses should be encouraged to consider the wider benefits of technological advances. Integrated accounting and accounts management packages have the potential to reduce wider administrative burdens as well as improve financial performance. However, introduction of a given platform will have wider implications for the business in the long term, and the choice of services should be made carefully and with a view to future expansion plans. The cost of implementing a properly scalable solution can appear prohibitive to a small business, while the limitations of cheaper options can compromise their overall effectiveness.


Q24. Would removing contractual barriers to selling invoices (eg as a result of a ban on assignment) be helpful to small businesses by increasing their access to services such as factoring and invoice finance?

There is undoubtedly a short term advantage to freeing up assignment of invoices. However caution should be exercised given the risks of rapid expansion in such a sector. A greater demand for factoring services is likely to encourage new entrants into the arena, and regulation will be key to avoiding potential abuses.

While the imposition of blanket restrictions on suppliers constrains their ability to effectively manage credit, the abolition of any right on the part of the payee to control assignment would be a step too far. Assignment of the invoice effectively binds the payer to a relationship with an unknown third party, and for sheer practical administrative reasons the proliferation of relationships to which free assignment of invoices might lead would be unwelcome.

All that having been taken into account, allowing small business to assign its debts freely would nevertheless be a positive step. Finance factoring has a number of advantages for the wider economy, and with the rise of technology such as e-invoicing can take place far more easily. The imposition of certain requirements (for example, allowing invoices to be sold only to certain named factors approved by the payer) might allow for an adequate compromise, although further monitoring and action if necessary may be required if for example the factoring agents were controlled or unduly influenced by big business so as to dilute the beneficial effects of the assignment (eg excessive factoring charges reducing the attractiveness of the option).



[1] ACCA & CBI (2012) Small Business Credit and the Recovery. London: ACCA