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Five Day Payment Terms
The economic downturn has precipitated change in many of the ways in which we do business. Over the last two years, keeping a tight control over cash flow has often made the difference between staying afloat and going under. In recognition of this, the Government has launched a series of procurement policy initiatives aimed at keeping the wheels of business turning, particularly in SMEs, which currently represent 60% of the UK workforce.
In late 2008, the Government took the first steps towards creating a more level playing field for public sector suppliers and announced a 10 day payment policy. By the end of May this year 19 out of every 20 invoices to central government sections were being paid within this time. In the March 2010 Budget the Government went one stage further and reduced this down to 5 days – essentially implementing an immediate payment policy.
Government departments are now required to pay 80% of all undisputed invoices within five days, and although this is considerably less than the usual 30 day terms – it is an achievable objective. The key to making this happen, will certainly involve an increase in automation technology. In fact, a further directive has specified that all government departments should explore the option of moving to immediate payment through electronic invoicing for all suppliers.
As well as promoting fairer payment terms, moving to greater automation will also have the added benefit of leveraging tighter controls within AP and that great friend of compliance; transparency. Furthermore, the Government is encouraging all NHS Trusts and local authorities to publish their prompt payment performance data on direct.gov.uk.
However, as many public sector suppliers sub-contract large areas of their business, for this policy to be effective, the benefits need to be pushed further down the chain. To that effect, all central government bodies must now include a clause in their contracts to ensure that the suppliers pay their subcontractors within 30 days. Although existing arrangements will be exempt from this new legislation (including Olympic contracts), the adoption of the system by current construction contracts on a voluntary basis is being invited.
Although this directive is limited to public sector bodies, there are signs that some in the private sector are taking note, albeit in a voluntary fashion. Some established household names such as British Gas and the John Lewis Partnership are among some of those large companies to apply for accreditation to the supplier payment code launched. Former Business Secretary Lord Mandelson said:
“The code focuses on ensuring firms pay their suppliers on time and do not attempt to change their payment terms retrospectively. This will be essential to help smaller firms maintain cash flow in the months ahead.”
The overall effect of these policies has been to drive forward decisive action to maintain a vital area of stimulus to the economy. Whilst they may have come into force as a result of one of the deepest and most complex recessions in decades, the benefits to working practice and to an organisation’s AP department are likely to be both long lasting and long ranging. In addition, while many public sector organisations have been successful in implementing automation solutions, the heat is now on for all public and private sector FDs to explore all the different technologies available and make sure they chose the best solution provider for them.
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