Time to pay?

This week’s Capital Agenda Blog comes from Matthew Evans, a Partner in EY’s Cash and Working Capital team.

The time taken by the UK’s biggest companies to pay their smaller suppliers has been an issue for successive governments, but recent events have pushed it much higher up the political agenda. Major companies’ payment practices are in the media spotlight and new regulations have introduced a level of reporting and transparency that will shine an even brighter light on their payment terms – and how well they abide by them

In this blog, I want to share EY’s analysis of the data submitted so far as part of new regulations introduced last year, looking at how payment practice vary by sector and how the process and additional transparency presents challenges, but also opportunity for companies – both large and small.

A regulatory nudge

The problem of late payment is especially acute for small and medium sized enterprises (SMEs), where the timing of a major payment can make the difference between solvency and bankruptcy. UK government figures show that over £26b of late payments were owed to SME’s in the UK as of June 2015. And it was a lack progress following the introduction of a voluntary Prompt Payment Code in 2008 – and an EU directive on late payments in February 2011 – that lead to the UK government introducing The Reporting on Payment Practices and Performance Regulations, which became effective from April 6th 2017.

The new regulations do not prescribe maximum payment terms, but they do require any company that meets two or more of the size thresholds to publish specific information regarding their current payment practices and performance. We have published more on:  who, what, why & when in our most recent publication on the regulations. But, the fundamental idea – much like gender pay gap reporting – is to influence behaviour by increasing disclosure.

It will take a few more reporting cycles before we know if this transparency is having the desired effect. But the submissions made by over 1,000 entities so far are already providing us with useful insight into the UK’s current payment practice.

How long do companies take to pay?

In terms of the  time companies take to pay, there is a wide distribution of responses, from less than 10 days, to over 120 days. Excluding the outlying payments of over 120 days leaves us with an average time to pay of 37 days, with most companies (53%) paying within 25-45 days. Indeed, more than 83% of companies pay in less than 50 days. Listed companies take four more days to pay than private companies.

Average time to pay

There are caveats to this data.  The average of 37 days to pay is low in our experience of payment functions. We suspect there are a few elements skewing the data to the left of the chart, including its fledgling nature – this doesn’t include data from companies with a December 2017 year-end- and the inclusion of establishments that meet the criteria to report, but have a low number of qualifying payments. Nevertheless, even given these qualifications, companies taking more than 60 days to pay are starting to look like outliers.

What’s the sector picture?

As alluded above, payment practices can vary considerably by sector, so we’ve also mapped the company data to industries. The chart below shows sectors ordered from left to right in order of time to pay with the yellow bar indicating the number of companies that have submitted so far.

AVERAGE TIME TO PAY - SECTOR

The majority of sectors have average time to pay of between 35-40 days. But, there are a few sectors who pay on average later than 45 days.  There aren’t many surprises in here. Most of those in this category – Automotive, Household and Personal Products, Materials (including packaging), Food & Beverage and Capital Goods (including construction) – all have a strong historic focus on working capital and cash throughout their supply chain.

As noted above, we expect the graph to shift more to the right as the number of submissions increases. But, if this overall sector picture holds, it will be interesting to see if other sectors to the right of the chart begin to face the kind of scrutiny we’ve seen levelled at the construction sector. Indeed if we overlay ‘time to pay’ data with data on the “percentage of invoices not paid within agreed terms” we can see that Capital Goods – whilst in the top right quadrant of less favourable payers – is by no means the longest or latest to pay.

SECTOR - TIME TO PAY AND % NOT PAYED

Burden or opportunity?

What does this mean for companies reporting this data and further down the supply chain?

On a very practical level, creating this report is a time consuming process at an already very busy time of year. It is taking many more hours than companies expect to create a clean dataset on which directors feel satisfied to sign off and meet their legal obligations. Some companies are also struggling to interpret the regulations to their specific circumstances and we have held a number of discussions with the regulator to gain further clarity.

So it’s not all that surprising that over 80% of 350 attendees on our recent webcast said that the regulations presented more of a burden than opportunity to their business – especially since close to 30% said that responses effectively took a month of employee time to pull together.

TIME TAKEN

Nevertheless, we have seen some companies use the process of readying themselves for this regulation as an opportunity to streamline their payment practices and give greater clarity to their payment processes.  Rationalising payment processes could improve cash flow forecasting, through reinforcing the role of central mailboxes for invoices, clarifying expectations and standards and encouraging better payment visibility. The regulations could help to drive a greater adoption of e-invoicing – currently only used by 25% of respondents

The data also provides an opportunity for companies to benchmark not only their own payment practices, but also the terms and conditions offered by their customers and suppliers. Are you being asked to pay quicker than other customers? Are other suppliers being paid more promptly? Of course, for most companies, this is a two-way street; but there is potential here to reduce inefficiencies and ensure a fairer more transparent and more efficient process.

Find out more…

You can find out more in our guide to the New Payment Practices and Performance Regulations, including a Roadmap to Reporting.

Our recent webcast provides further analysis of the data submitted thus far, including sector analysis and dispute resolution.