Late payment hurts small companies and has knock-on effects for the wider economy

If you’re a small company, cash flow is king. That leaves suppliers to GlaxoSmithKline with a problem. The UK pharmaceutical giant is in the process of changing its payment terms. Suppliers say they may have to wait up to 95 days to collect what’s owed to them.

The news has not gone down well. “Morally bankrupt,” the Forum of Private Business, a UK small business association, has labelled it. The forum accuses the firm of “boosting its own profits whatever the cost to smaller firms”. Sainsbury’s and O2 took similar steps late last year, sparking fears among small suppliers of a growing trend.

Recent research by the Institute of Credit Management finds that SMEs wait on average 41 days longer for payment than their contracts stipulate. The implications for these firms are very real, with many being pushed out of business.

Clearly, there’s an ethical obligation on large companies to pay for what they procure. Hard-headed business reasons exist too. Retaining trust is one significant factor, says Nicole Dando, head of projects at the Institute for Business Ethics. “By not paying on time, or changing terms arbitrarily, [companies] may not be able to attract or retain the suppliers they want to work with,” Dando says.

It’s not worth it

And companies that delay their invoice run to save money are guilty of a “false economy”. So says Simon Lee, business development manager at Business in the Community. When suppliers go bust, it often proves “time-consuming and expensive” for the procuring firm. Not to mention the negative “domino effect” that insolvencies have throughout the supply chain, he says.

GSK tells Ethical Corporation that its new system will have “little to no impact” on small suppliers. But that’s as long as the supplier submits its invoices towards the end of the month. GSK also offers alternative payment schedules and supply chain finance for SME suppliers, a company spokesman says.

The Forum of Private Business wants more guarantees. It is calling on the government to step in and “prioritise tackling the culture of poor payment”.

Michael Fallon, the UK’s business and enterprise minister, went on record in January to say he was “going to war” on the issue. A source at the business and enterprise department says a series of “name and shame” actions against late payers is planned in the coming weeks.

Fallon’s recent tough talking follows his call in November for FTSE 100 firms to sign the prompt payment code, an industry best-practice standard. Not many heard him, it seems. In the five years since its launch, fewer than one-third of the UK’s largest companies have put their name to the code. Interestingly, GSK is among that number, raising questions as to the code’s effectiveness.

Establishing an ethical payment system should not be too hard. The first imperative is to keep things simple, says BITC’s Simon Lee. Electronic and online invoicing provides an obvious answer. Lee advocates shorter payment times too, with the ideal being between 15 and 30 days. Responsible companies should agree terms with suppliers at the outset, he adds. Once that’s done, don’t go changing them retrospectively. Nor should companies extend the length of payment “on unreasonable grounds”.

Companies are quick to chase customers who don’t pay. The dynamics of client relationships mean few suppliers are as demanding in return. Ethical and business considerations behove large companies to take the lead and pay up on time.