Posted on May 03, 2016

The true cost of late payment

I’m usually the eternal optimist who tries to see the positive in any situation, no matter how dire. However, my heart sank when our Head of Finance presented the following figures:

  • Last month, we had over 10% of our annual turnover in overdue debts.
  • Last year in Thomson Ecology, only 17% of payments were received within 30 days from invoice, and 36% came in after 60 days.

In Thomson Habitats, only 5% of invoiced value was paid within 30 days, 63% later than 60 days, and 21% took 120 days or more. Some payments were more than 6 months overdue.

As an SME, with limited financial backing, we find these numbers make managing our cash flow difficult – particularly as we are a largely seasonal business with bills that need to be paid at month-end come what may.

At Thomson, we believe in paying our suppliers on time, and in some cases even early. We believe that doing this helps to build strong relationships with our supply chain, but critically, we get better service, which means we can offer a higher quality of service to our end client. Furthermore, if we’re struggling, our supply chain is prepared to work collaboratively with us to overcome any issues. However, this becomes incredibly difficult to maintain, when on a back-to-back contract where you have agreed 35 days payment terms with your supply chain, but you end up not being paid for a further 120 days by your client!

As an industry, there needs to be a movement away from this Win – Lose scenario that some senior managers in large companies seem to relish. Beating your supply chain down on price, and then paying them late – or unjustifiably not wanting to pay the full contracted value of the works at all – does not create a loyal, collaborative supply chain. Instead, it creates a cycle of conflict, brinkmanship, with compensation events and early warning notices being issued for every change imaginable. And decreasing trust.

Instead, there needs to be a movement towards a Win – Win scenario and true collaboration. The wider market is slowly waking up to this. However, as with any change in culture and values, it takes time for it to become embedded.

I believe that improvements can be achieved through

  • Changes in legislation to protect SMEs from some less scrupulous companies
  • Commitment from the initial point of enquiry, from the client and the supply chain, to work with honesty and integrity towards a common goal
  • Agreement to a project charter of ethical values – akin to that which Crossrail introduced
  • Buy-in from both the client and supply chain to mutual fair-dealing. That is, if you deliver your scoped works on time, you get paid on time
  • Correct and open administration of the contract – particularly with regard to variations and payment notices
  • Use of project bank accounts that are funded by the end client
  • Commitment from the wider industry to have SME payment terms set at no more than 45 days

I think as an industry we are beginning to leave the dark days behind us. However, there are still hurdles that need to be overcome. The collaborative spirit that is beginning to emerge – a common focus on open co-operation and delivering projects to the best standards and on time – can only serve us well in the future, and help to fuel periods of sustainable growth and profitability.

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      Knowledge Hub The true cost of late payment