How quickly does your business pay creditors? And how often are incoming payments overdue? Cash flow is crucial to any business’ effective operation, and a culture of late payments can cause irreparable damage, writes UK Business Finance’s Karl Hodson …
One of the first tell-tale signs that a business may be on the road to becoming insolvent is poor company cash flow. If a business is consistently cash poor, this means that it is probably cash-starved, and therefore can’t tend to company liabilities such as staff wages, rent, utility bills and stock replenishment costs.
The latest high-profile casualty for the furniture industry was the administration of Made.com, as it ran out of cash – this shows that the time is ripe for even the most in-demand retailers to work harder to protect their financial position and secure a fighting chance to stay afloat amid the energy crisis.
Late payments – how rife is the practice?
The Time is Money: The Case for Late Payment Reform from the Federation of Small Business (FSB) includes up-to-date findings on late payments that highlight the current state of play between businesses in relation to payment timeliness and tardiness. The findings include:
* 52% of businesses experienced late payments
* 25% of businesses reported increased late payments
* 37% of businesses applied for credit to manage their cashflow
To cope with the damaging impact of late payments, over one-third of businesses turned to alternative avenues to maintain company cash flow. Without sufficient cash flow, a business can rapidly collapse under the weight of growing overheads and persistent pressure from creditors to make payments.
While over half of businesses reported late payments, a quarter reported increased late payments, which shows that the practice is widespread, with little in the way to deter big businesses from engaging in this manner.
In the retail space, the practice of late payments is a hot topic, with industry leaders being called out for unfair payment practices.
The IPSE Payment Practices Index ranks the payment practices of some of the largest companies in the UK, including furniture retailers Furniture Village, Dreams and Oak Furnitureland. Here’s how they ranked, including average time to pay, percentage of invoices paid within 30 days, and percentages of invoices not paid within the agreed terms.
The following furniture retailers took between 50 to 67 days on average to pay invoices: Furniture Village (67 days); Dreams (67 days); Oak Furnitureland (33 days); DFS (29 days); and Habitat (50 days).
The percentage of invoices paid after 60 days are as follows: Furniture Village (54%); Dreams (57%); Oak Furniture Land (2%); DFS (4%); and Habitat (30%), and the percentage of invoices not paid within agreed terms include Furniture Village (11%), Dreams (12%), Oak Furniture Land (26%), DFS (52%) and Habitat (22%).
While only two of the five furniture retailers hit an average around the 30-day mark, what happens when the tables are turned, including the long-term effects of late payments on retailers – particularly when the business is cash poor?
Why late payments can make or break a business
Late payments can fuel a cycle of disruption for businesses as, if a string of invoices are paid late, this could trigger payment delays to a wide range of creditors, including suppliers, HMRC, landlords, staff and customers. Once this domino effect is in full swing, it has the power to cut off the ability of the business to fuel investments, such as upgrades to business operations, recruitment drives and stock diversification.
If the pool of company cash is stagnant, this can hinder progress and cut away at the ambition of the business, which can be damaging to its financial future.