Business Finance: Chris Sheppard explains plans to improve the Prompt Payment Code
- Credit: Archant
For the first time the Queen’s Speech earlier this month included a Bill designed for the UK’s army of SME businesses and referenced measures to improve the existing Prompt Payment Code (PPC).
The PPC was originally established in 2008, requiring larger businesses to publish their payment terms in order to increase transparency on the ethical treatment of small suppliers. So far, just over 1,500 firms have signed up to abide by the terms set out in their contract.
Currently payments made by public bodies to tier two subcontractors must be paid within 30 days, which has now been extended to tier three in the construction sector. The new changes will ensure small firms get treated fairly by mandating prompt payment terms through the public procurement supply chain, and ensuring public bodies report on payment performance.
However, tackling private sector late payment where b2b payments should be made within 60 days is more challenging and, although the details are not yet clear, it could involve an online rating system that highlights companies that pay late. In general, payment terms have been moving increasingly towards a 60 day culture and it is only at the extremes that the directive could have an impact.
It is the certainty of payment that small businesses rely on because it enables them to forecast/budget sensibly. So what can small businesses do to help themselves?
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: : Find out if your customer runs a supplier finance scheme which allows a supplier to redeem cash against an invoice within a few days for a discount;
: : Request customer requirements such as POs (purchase orders);
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: : Ensure invoices are sent to the appropriate contact/location stipulated;
: : Understand your customers payment processes ? what authorisations are required and what timescale is required for your invoice to hit the anticipated payment run;
: : Ensure invoices arrive with/dated at the point goods are dispatched (or at least when they are delivered);
: : Consider pre-due date contact with your customer to ensure that there are no barriers to on-time payment
: : Think about other areas of working capital to reduce the overall cash operating cycle; and
: : Consider investing in accounting software programmes which help with billing schedules and have flagging systems which allow you to act immediately on overdue accounts.
Small businesses have an important role in driving forward the economy and cash is king when it comes to the financial management of a growing company. Being unable to get a handle on cash flow management can lead to reduced profitability, late payments to your own suppliers, and reduced growth.
: : Chris Sheppard is transaction and restructuring director at KPMG in East Anglia.