Mind the Payment Gap

Mind the

Payment Gap

Siemens Financial Services

Management Summary

• SMEs are an integral part of the UK economy,

accounting for % of all private sector turnover



•

SMEs bear the brunt of late payments and long

payment terms. Businesses (with turnover of

under £m) wait for  days for payment.



Businesses with an annual turnover of £m-£m

wait on average - days,



and the largest

businesses wait on average  days



•

A typical SME spends  hours a year chasing

outstanding invoices.



The cost associated with

this time taken is £. billion per year.



Unpaid

invoices account for % of SMEs’ annual

turnover.



These costs combined mean that SMEs

are missing out on over £billion of cash flow

•

Outstanding bills are viewed as a drain on cash

flow, yet finance products such as invoice finance

can be used to unlock funding



•

Invoice finance is increasingly being seen by SMEs

as a flexible and reliable tool to unlock working

capital and now provides more funding than ever

before to SMEs with funds used across the UK

recently exceeding £billion for the first time



Compared to larger companies, SMEs

tend to suffer from slow and/or late

payments disproportionately due to their

position typically towards the end of the

supply chain.

SMEs account for % of all private sector turnover



and

UK SMEs are missing out on £ billion of liquid cash

flow, when considering the value of UK SMEs’ unpaid

invoices and the costs associated with pursuing payment.

Slow payments can threaten SMEs’ ability to trade, stifle

appetite for growth and recruitment and, in the worst

cases, lead to insolvencies. As a consequence, leaving

SMEs to cope with the problem is harming the economy.

Unlocking the potential cashflow could have significant

benefits for economic growth. According to the Federation

of Small Businesses (FSB), at the start of  .% of UK

businesses were SMEs. SMEs employed . million people

and accounted for % of all private sector employment in

the UK.



Nevertheless, despite their importance, waiting

for payment of invoices is a significant problem for SMEs

particularly as some large corporations look to extend their

payment terms.

UK SMEs missing out on over £ billion of liquid

cash flow because of slow and late payments

Organisations gauge how long companies are taking to

collect payments by the Days Sales Outstanding (DSO);



a measure of the average number of days that a company

takes to collect revenue after a sale has been made.



The average DSO figure of UK companies (of all sizes) is said

to be  days



(compared with a global average figure of

. days



and a large company figure of  days



Research from the Asset Based Finance Association (ABFA),

however, demonstrates that SMEs



are waiting almost two

weeks longer – an average of  days.



The slow payment problem, broadly speaking, comes down

to two primary causes, long payments terms and payments

that are made late.

Long Payment Terms

 day payment terms are becoming more commonly

demanded especially from large companies. In , a

well-known pharmaceuticals company came under fire for

introducing a new  day timescale for its suppliers, joining

other companies such as iconic supermarkets, drinks

companies and IT giants. The Forum of Private Business said

this move demonstrated “scant regard” for small suppliers.



In June , one large company justified extending its

payment terms to  days with the statement: “Extending

our payment terms allows us to better align with industry

and make sure we compete on fair grounds, while

simultaneously improving transparency and predictability

of payment processes.”



This suggests that since a few large

companies started the ball rolling, others are following suit.

A chain reaction then tends to occur: if one company alters

its payment terms it has impact along the supply chain. In

/, .% of British businesses had to take specific

measures to correct cash flow; nearly % had to delay

payments to their own suppliers.



And, since SMEs tend to

be nearer the end of the supply chain, they tend to most

feel the cumulative effect.

Late Payments

In its latest international survey of BB payment behaviour,

Atradius found that around % of British respondents

had received payments from customers late.

An average

of .% of the total BB receivables remained unpaid

after the due date, % higher than the previous year.



The average DSO of British businesses was two weeks longer

in  than . This trend is persisting; one in four British

companies expects its DSO to worsen in -.



In , the then Business Minister wrote to all FTSE 

companies urging them to sign up to the Prompt Payment

Code (PPC).



The PPC, which was introduced in , is a code

that any business of any size can voluntarily commit to. It

includes a  day maximum payment term for all signatories

and aims to make a  day payment term standard practice.



In March , FTSE  companies that had failed to sign up

to the code were ‘named and shamed’.



Despite these efforts,

even now, the PPC still has only just over  signatories,



and dealing with long payment terms is a continuing issue.

The European Directive on combating late payment in

commercial transactions – another measure introduced

in  – states that payment debtors will be forced to pay

interest and reimburse the reasonable recovery costs of the

creditor if they do not pay for goods and services on time

( days for business and  days for public authorities).



The reality, however, is that imposing the legislative solution

is a last resort, to be used when the supplier/customer

relationship is strained or has broken down.



“Invoice finance plays an essential

part of our business model. In order

to properly plan and structure for our

growth targets we need a constant

stream of working capital, and

invoice finance provides us with this.”

David Shaw, Finance Director of Proton Group

The Impact of Late Payments

At the most basic level, late payments cost SMEs time and

resources to track and push through. Research suggests that

a typical small business spends  hours a year chasing

invoices.



And when the cost associated with the time taken

is multiplied across the number of SMEs in the UK the cost

of this process is considerable. Research from 

demonstrates that in total it costs SMEs £. billion to

recover overdue payments, an average of almost £,

each



– a significant amount of money, particularly for SMEs.

It’s not surprising, then, that late payments are a key

concern for SMEs. % of small businesses cited cash flow,

working capital and late payments as their main business

concerns. Of these, almost a fifth claimed that the situation

had worsened over the past year, and % of these firms

said it is threatening their ability to trade.



For some SMEs, however, the cost of late payment

is even more acute. In a survey of  SMEs, % reported

that late payments had put them at risk of closure.



For a significant proportion that risk becomes reality;

The Association of Business Recovery Professionals has said

that late payment is a major factor in one in five corporate

insolvencies.



Quite apart from these measurable

consequences, many sources allude to the impact of late

payments on SMEs’ appetite for investment and willingness

to hire.



“It’s understandable that when a

sector is struggling, companies

would look to give themselves longer

to pay their bills. But this has a knock

on effect for others. Our biggest

expenditure by far is our wage bill,

so to avoid paying staff late – or even

worse laying them off – it’s essential

we bridge the gap between providing

a service and being paid for it.”

David Rowan, Managing Director, Epic International Ltd

The Invoice Finance Solution

The collective amount of potential capital locked up in

unpaid invoices and the associated costs of chasing them is

staggering. Unpaid invoices amount to % of SMEs annual

turnover, or £ billion.



Coupled with the costs

associated with pursuing payment, a total of £. billion

is up for grabs.



Although many companies view

outstanding bills as a drain on their cash flow, through

solutions such as invoice finance they can be leveraged

to unlock funding.

By using invoice finance, when a company invoices their

customer, up to % of the approved invoice total is

straightaway advanced by the finance provider, with the

remaining % paid once their customer settles the balance.

Whilst companies will still need to ensure the eventual

payment of their customers’ invoices, invoice finance

provides the company with essential working capital so it can

then invest in expanding its business without having to wait

for bills to be paid.

Invoice finance is rapidly growing in popularity. According to

BDRC Continental (an independent research consultancy)

between  and , the percentage of SMEs using ‘core’

forms of finance (loans, overdrafts and/or credit cards)

declined from % to %. Conversely, the use of other forms

of finance (leasing, invoice finance etc.) has grown, with %

of SMEs using one or more of these ‘other’ forms of finance

in the last year. Invoice finance companies now provide more

funding than ever before to SMEs with funds used across the

UK recently exceeding £billion for the first time.



With access to working capital SMEs can look to invest in

areas that have been viewed as optional extras or aspirations.

For example, promotion, advertising and entertainment only

account for approximately % of an SME’s spend; employee

benefits .%, and business equipment %. Clearly, small

businesses are focusing their efforts on paying for rent (.%)

and employee wages (.%).



Nevertheless, with more cash

at their disposal, taking on extra staff, more adventurous

marketing, expansion into new product or service lines,

or new territories could all be within businesses’ grasps.

“Having that money available means

it is ready to invest in business

development. As we gain more

customers we’ll access more funds

through invoice finance, which we

can then invest in attaining even

more customers and so it snowballs.

We’re really excited about the

coming months”.

Paul Smith, Managing Director, Triplex Distribution

For many years, SMEs have – quite rightly – highlighted the

fact that they suffer from late payments far more heavily than

their large corporate counterparts. When unpaid invoices are

taken collectively, and added to the cost of the time and

resources spent chasing their progress, the total value of the

late payment problem for SMEs exceeds £ billion. And the

possibilities of what SMEs could do with this working capital

are almost endless.

Rather than wait for a governmental resolution more and

more small businesses are looking to leverage invoice finance

as the answer. Having the majority of an invoice value

advanced as soon as the invoice is issued means the business

is free to deploy the capital to wherever it is required,

whether that be staple expenses like staff wages, or more

aspirational uses such as marketing or product development.

Whatever they use it for, these businesses are realising that

their unpaid invoices can be an opportunity rather than a

burden. With more and more businesses joining the trend,

and given the scale of influence that UK SMEs already exert,

the impact on UK economic growth can only be good.

Department for Business Innovation & Skills, Business Population Estimates for the UK and

Regions in 2015, November 2015, http://www.fsb.org.uk/media-centre/small-business-statistics

Asset Based Finance Association (AFBA), Smallest businesses waiting longer than ever for

payment, 13 July 2015, http://www.abfa.org.uk/news/97/Smallest-businesses-waiting-

longer-than-ever-for-payment

ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/

Late-Payment:-An-analysis-by-sector

ABFA, Late Payment: An Analysis by Sector, 01 May 2015, https://www.abfa.org.uk/news/92/

Late-Payment:-An-analysis-by-sector

ByteStart, Small firms spend 130 hours each year chasing overdue invoices, 07 June 2012,

http://www.bytestart.co.uk/130-hours-overdue-invoices.html

Paul Davies, The UK`s SMEs spend nearly 11 billion a year chasing overdue payments. , 27

July 2015, http://debtcol.co.uk/news/the-uks-smes-spend-nearly-11-billion-a-year-chasing-

overdue-payments

ABFA, UK SMEs owed GBP 67bn in unpaid invoices, 21 September 2015, http://www.abfa.

org.uk/news/101/UK-SMEs-owed-GBP-67bn-in-unpaid-invoices

ABFA, UK SMEs owed GBP 67bn in unpaid invoices, 21 September 2015 https://www.abfa.

org.uk/news/101/UK-SMEs-owed-GBP-67bn-in-unpaid-invoices

ABFA, UK businesses secure record amount through invoice finance - breaks GBP 20bn

barrier for first time, 05 September 2016, http://www.abfa.org.uk/news/125/UK-businesses-

secure-record-amount-through-invoice-finance-breaks-GBP-20bn-barrier-for-first-

time#sthash.csJjUmHO.dpuf

Department for Business, Innovation & Skills, Business Population Estimates for the UK and

Regions in 2015, November 2015, http://www.fsb.org.uk/media-centre/small-business-statistics

Department for Business, Innovation & Skills, Business Population Estimates for the UK and

Regions in 2015, November 2015, http://www.fsb.org.uk/media-centre/small-business-

statistics

A company’s DSO can be calculated by dividing its outstanding payments that it is waiting

to be settled by the total value of services/products sold. This figure is then multiplied by

the number of days in the month, quarter or year being measured. Therefore, if in May,

a company had sold £100,000 of products/services and £50,000 had not yet been paid for,

its DSO would be 15.5 (50000/100000 x 31 = 15.5).

Investopedia, Days Sales Outstanding – DSO, http://www.investopedia.com/terms/d/dso.asp

Atradius, Atradius Payment Practices Barometer: International Survey of B2B Payment

Behaviour Great Britain – Key Survey Results, Spring 2016

PWC, Bridging the Gap: 2015 Annual Global Working Capital Survey, 2015

Defined as companies with a turnover of less than £1 million

ABFA

http://www.telegraph.co.uk/finance/newsbysector/pharmaceuticalsandchemicals/9798947/

Glaxo-disregards-suppliers-with-90-day-payment-terms.html

http://www.managementtoday.co.uk/opinion/1187317/Lengthening-payment-terms-its-

worse-tax-avoidance/

Atradius, Atradius Payment Practices Barometer: International Survey of B2B Payment

Behaviour Great Britain – Key Survey Results, Spring 2016

Atradius, Atradius Payment Practices Barometer: International Survey of B2B Payment

Behaviour Great Britain – Key Survey Results, Spring 2016

Atradius, Atradius Payment Practices Barometer: International Survey of B2B Payment

Behaviour Great Britain – Key Survey Results, Spring 2016

Department for Business, Innovation & Skills, Big companies pledge to pay promptly

following government drive, 04 March 2013, https://www.gov.uk/government/news/big-

companies-pledge-to-pay-promptly-following-government-drive

Chartered Institute of Credit Management , Prompt Payment Code Q&A, http://www.

promptpaymentcode.org.uk/faqs.htm

Dan Martin, Named: The big companies not signed up to code for paying suppliers on time,

04 March 2013, http://www.businesszone.co.uk/deep-dive/growth/named-the-big-

companies-not-signed-up-to-code-for-paying-suppliers-on-time

Chartered Institute of Credit Management , Prompt Payment Code Q&A, http://ppc.

promptpaymentcode.org.uk/ppc/ppc_signatory.a4d

Department for Business Innovation and Skills, DIRECTIVE 2011/7/EU ON COMBATING LATE

PAYMENT IN COMMERCIAL TRANSACTIONS, October 2014, https://www.gov.uk/government/

uploads/system/uploads/attachment_data/file/360834/bis-14-1116-a-users-guide-to-the-

recast-late-payment-directive.pdf

Sirena Bergman, A guide to invoicing – Q&A roundup, 03 August 2012, http://www.

theguardian.com/small-business-network/2012/aug/03/how-to-invoice-best-of

Telegraph, Late payments: a scourge on British SMEs, 19 May 2015, http://www.telegraph.

co.uk/sponsored/business/sme-home/news/11615473/late-payments-scourge-smes.html

Paul Davies, The UK’s SMEs spend nearly 11 billion a year chasing overdue payments. , 27

July 2015, http://debtcol.co.uk/news/the-uks-smes-spend-nearly-11-billion-a-year-chasing-

overdue-payments

Telegraph, Late payments: a scourge on British SMEs, 19 May 2015, http://www.telegraph.

co.uk/sponsored/business/sme-home/news/11615473/late-payments-scourge-smes.html

Tungsten Network, Late payments put a quarter of UK SMEs at risk of insolvency, 10 August

2015, http://www.tungsten-network.com/press-releases/2015-late-payments-put-a-quarter-

of-uk-smes-at-risk-of-insolvency/?id=1186

Telegraph, Late payments: a scourge on British SMEs, 19 May 2015, http://www.telegraph.

co.uk/sponsored/business/sme-home/news/11615473/late-payments-scourge-smes.html

Telegraph, Late payments: a scourge on British SMEs, 19 May 2015, http://www.telegraph.

co.uk/sponsored/business/sme-home/news/11615473/late-payments-scourge-smes.html

Based on 1.8 trillion SME annual turnover: Department for Business Innovation & Skills,

Business Population Estimates for the UK and Regions in 2015, November 2015, https://

www.gov.uk/government/uploads/system/uploads/attachment_data/file/467443/bpe_2015_

statistical_release.pdf

Paul Davies, The UK`s SMEs spend nearly 11 billion a year chasing overdue payments. , 27

July 2015, http://debtcol.co.uk/news/the-uks-smes-spend-nearly-11-billion-a-year-chasing-

overdue-payments

ABFA, UK businesses secure record amount through invoice finance - breaks GBP 20bn

barrier for first time, 05 September 2016, http://www.abfa.org.uk/news/125/UK-businesses-

secure-record-amount-through-invoice-finance-breaks-GBP-20bn-barrier-for-first-

time#sthash.csJjUmHO.dpuf

Jason Del, Infographic: How Small Businesses Spend Their Money, 19 July 2011, https://

www.americanexpress.com/us/small-business/openforum/articles/infographic-how-small-

businesses-spend-their-money/

Conclusion

Siemens Financial Services Limited

Tel: 01753 434268

Fax: 01753 434499

Email: invoice.ﬁ[email protected]

www.siemens.co.uk/ﬁnancialservices

Sefton Park, Bells Hill, Stoke Poges

Buckinghamshire SL2 4JS