Late payments remain a persistent issue globally nearly a decade past the 2008 crisis, but the long-term outlook is optimistic. The situation is improving as evidenced by a 3 percent gain in the cash-to-cash cycle of UK companies. The number seems small, but as a result, £8.8 billion previously tied up in working capital is now back to work in the UK economy, according to Grant Thornton’s latest UK Working Capital Survey.
Individual businesses, not just the economy benefit by optimizing working capital strategy, notes the Grant Thornton research. Better working capital performance positively impacts a bottom line; the 10 percent of companies who improved working capital three years in a row have five times better EBITA performance than the rest of the sample in terms of profitability. The survey result noted that 2016 was the first time in five years that UK corporate cash balances decreased overall.
What is interesting about this study is that the improvements were primarily made by midsize companies, rather than large corporates. The move is a positive signal for all and underscores the importance of putting working capital to work. Still, there is work to be done on the issue based on the latest figures for UK small businesses.
In the UK, one in three payments to small businesses are late and entrepreneurs spend an average of 1.2 days a month chasing late payments according to the UK Federation of Small Business.
Late payments slow business growth and negatively affect the health of a supply chain. While larger suppliers tend to have more flexibility and the capacity to absorb fluctuations in cash flow, small businesses cannot scale and therefore find it hard to compete with larger suppliers. Some 50,000 UK businesses close each year as a result, costing the UK economy £2.5 billion annually, as noted in a recent article in The Guardian.
“The UK is home to a record 5.5 million small businesses. It’s completely unacceptable that [they] are owed £26.3 billion in late payments. Large businesses have an important role to play and the guidance published today will help them fulfill their responsibilities and improve payment practices across the board,” says UK small business minister Margot James.
Late payments are a global problem that need a global solution
According to research conducted by Coface, a global credit insurer, 64 percent of the companies surveyed in the Asia-Pacific region (APAC) experienced late payments in 2016. The number of participants experiencing late payments surpassing 120 days increased from 8.2 percent in 2015, to 12.5 percent in 2016.
Some APAC companies face extreme late payments consisting of at least 10 percent of their total annual turnover, resulting in significantly reduced cash flow. The number of companies facing extreme late payment conditions has increased 2 percent since 2014, with the largest increase in risk associated with non-payments noted in China, Thailand, and India. Companies in Australia (14 percent) and Japan (9 percent) also suffered from late payments, with amounts exceeding 2 percent of their annual turnover. On a positive note, the Coface research reports some improvements in Singapore, Hong Kong, and stability in Taiwan.
Access to working capital for midsize companies benefits smaller suppliers, too
A common misconception is that late payments only impact small companies. As noted in a recent Forbes article, there is a lack of funding options for companies between 10–99 employees and $1 million–$9.9 million in revenue.
Forbes refers to this as a “No Man’s Land,” a middle gap between small business lines of credit and loans that cap out at $100,000, and the long-term and institutional lending options that focus on expansion from $1,000,000 in lending and up. Many businesses do not fall into either of these categories, therefore making them ineligible for funding.
Cash flow issues for midsize businesses add to the pressure on small business. According to Dynamic Business, midsize businesses in Australia alone owe $8 billion in outstanding payments to their suppliers, with more than $2 billion currently overdue. This amount is just a small fraction compared to the $43 trillion in outstanding accounts receivable worldwide.
Improving access to working capital for midsize companies not only solves for this funding gap, it allows them to pay their small suppliers more quickly.
Trade finance offers a solution to optimize working capital
To offset late payments, there is growing interest in invoice finance solutions among SMEs. Nearly 20 percent are looking to such alternatives, as noted in the C2FO Working Capital Outlook Survey. These include supply chain finance, invoice discounting, and more innovative solutions such as C2FO. Bank loans and peer-to-peer lending are also on the rise.
“Without funding alternatives, suppliers often sacrifice growth and financial stability to meet customer demands. The impact of this lack of access to working capital is greatest for smaller suppliers which may be operating with market capitalization of one-tenth of 1 percent of the size of even a median-sized customer, and which may incur significantly higher interest rates,” says Sean Van Gundy, Managing Director at C2FO.
Trade finance options offer some of the best funding alternatives and strategic optimization of working capital. Options like supply chain finance (SCF), C2FO and P-cards provide suppliers and buyers working capital flexibility. C2FO, as one example, offers balance sheet improvement for buyers and affordable, on-demand cash flow control for suppliers.
Prompt Payment Code and other initiatives build support for a solution
Earlier this year the UK government along with the European Union implemented regulations that encourage large businesses to publicly report the details on how quickly they pay their suppliers. Similar initiatives include the Prompt Payment Code, a set of standards for payment practices and best practice and is administered by the Chartered Institute of Credit Management. C2FO is a signatory along with over 2000 others.
C2FO applauds the increased commitment of major companies to strengthen the working capital health of their suppliers. In 2017, Philip King, Chief Executive of the CICM, which manages The Prompt Payment Code (PPC) initiative in the UK, has welcomed C2FO’s support to improve payment practices:
“The C2FO unique marketplace approach gives suppliers the opportunity to get paid before terms, should they wish to, in order to better control their cash flow and grow their business, whilst enhancing relationships with their buyers,” said King.
An outlook for working capital
Although there is still a lot of room for improvement globally, late payments have been reduced by 6 percent from 2015 to 2016 in the US, according to the C2FO Working Capital Outlook Survey.
We also found that when deciding which customers to do business with, 75 percent of global business respondents found it important that their customers offer supplier friendly accelerated payment options.
“As the large majority of SMEs still finance themselves with cash flow from operations, there is a significant opportunity for businesses to optimize working capital through better relationships with customers and better use of accounts receivables,” said Colin Sharp, SVP EMEA at C2FO.
In our upcoming 2017 Working Capital Outlook Survey, we’ll take a deeper look at the state of working capital and the late payments issue by region, how to optimize working capital strategy and the path forward to solving access to liquidity for SMEs.