Private sector suppliers, including limited company contractors, are focusing increasingly on their cashflow and threatening clients with legal action if they do not settle their invoices in a timely manner.

Lovetts, a debt recovery firm, reported recently that the average timespan from invoice date to ‘letter before action’ is now 68 days; down from 72. Suppliers’ willingness to wait for payment has now been decreasing for the last three consecutive quarters.

Lovetts’ MD, Charles Wilson, said that suppliers have adopted an attitude of debt is debt and it makes no difference who the customer is. He suggests that last year’s forbearance has now run its course and suppliers are getting tough on any late payers.

He went on to explain that last year, businesses gave customers much more leeway before threatening legal action in order to maintain a good working relationship.

However, companies must make sure they carry out their threats and pursue a legal claim. If they don’t follow up, they will be accused of crying wolf.

80% of businesses that send letters warning debtors of recovery action do secure payment, so they are an effective deterrent. But with debts to SMEs totalling a record £33.6 billion, suppliers must demonstrate that they mean business when it comes to chasing overdue invoices.

Bad debts are not the only problem facing UK SMEs at the moment.

Global recruiter Hays conducted research that discovered that 55% of jobseekers think they could get better benefits working for a larger organisation, and 52% are concerned that smaller firms lack stability.

Small businesses need to attract skilled and talents personnel in order to remain competitive and employers should take the time to explain the direction the business is heading and future growth opportunities to potential recruits, Hays director Charles Logan said.

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The Times newspaper recently asked readers to rank the UK against five key competitors for tax, business friendliness, infrastructure, skills and workforce.

It will probably come as no surprise to learn that voters ranked the UK last when it came to personal and business taxation. In fact that UK didn’t come out smelling of roses many categories!

On the plus side, 57% of respondents believe the UK is a better place than France to do business, and 56% said it is better than doing business in India. Voters were also reasonably positive about the British workforce’s skills and the quality of education, although Germany and France ranked higher.

On the down side, 70% believes the UK performs worse than the US on personal taxation and 75% says it has worse wealth creation taxes. In fact a mere 6% of the respondents said were happy with the rates of personal taxation in the UK and only 7% said corporation and capital gains taxes were good or excellent.

The US, China and Germany were all ranked above the UK when it comes to setting up and running a business. 23% said the UK was a good place to set up but 30% said it was either poor or very poor.

However, the UK coalition wants to make Britain more small business and limited company contractor friendly and plans to open up more contracts to smaller firms. The government has also been trying to crack down on the issue of late payment to help small businesses better manage their cash flow.

The CBI welcomes the coalition’s moves but warns that smaller firms still have a number of obstacles to overcome. Chief policy director, Katja Hall, has urged SMEs to focus on the long-term outcome when they bid for public sector contracts. To compete with the larger players, SMEs must think about the outcomes and what it is they hope to achieve.

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London and the South East of England top the late payments league, according to the latest study from Bacs.

Nearly 400,000 UK enterprises suffer because of delayed payments and the average owed to one company at any one time is £27,000. Although more firms in the south of England are owed money, they do not have as much debt outstanding as companies in the Midlands who are owed up to £38,000.

Large corporations are responsible for the lion’s share of the debt. They owe £24 billion to British SMEs and in some cases invoice settlement is up to 52 days overdue. The public sector and not-for-profit organisations on the other hand improved their payment times in the last half of 2010.

33% of SMEs say big companies are behind overdue bill payments and those operating in the manufacturing sector are the most likely victims. 53% of UK SMEs have suffered late payment, up 8 percentage points from June last year. When they do eventually receive settlement it’s an average 39 days over the agreed payment terms and this rise rises to nearly 50 days overdue in the distribution sector.

The burden of chasing overdue bills is having an adverse impact on smaller businesses. They now need to devote half a day every week to chase payment, equating to over 158 million man hours the British economy loses just to pursuing overdue debts.

At the same time, the number of firms using Invoice Financing to help improve cashflow rose by 16% in the year ending April 2011, according to the Royal Bank of Scotland.

Mike Hutchinson, Bacs’ head of marketing, urges more SMEs to use automated payments if possible so they can better manage funds which are under their control.

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Late payments increased by 16%, to 25.7 days, in the final quarter of last year, a situation which had an adverse affect on some recruitment companies.

The amount of recruitment agencies that went into administration increased slightly during quarter 4. In the third quarter of 2010, 9 agencies were put in the hands of the administrators compared to 13 in Q4. However, the Q4 figure was 28% down on the corresponding quarter the previous year.

Large businesses are still the worst offenders when it comes to late settlement, according to the most recent research from Experian. Although these large enterprises have reduced their bad payment performance, they still take an average 35.74 days to settle. Micro-businesses with just 1 or 2 employees tend to be the promptest payers at 20.47 days.

The problem of late payment can have a serious affect on the cashflow of small businesses. Recruiters and limited company contractors should stay vigilant and consider the worst case scenario.

David Grier from MCR, the corporate restructuring and insolvency company, advisers recruiters to think about ways of reducing rent, negotiating with HMRC to defer taxes and offer such reassurance to their bank as may be necessary to ensure that it will continue to make funding available.

Any company that is facing financial difficulties would be well advised to contact their accountant or business advisor immediately. Dealing with these problems straight away will give businesses a better chance of survival.

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Rather than reversing the trend for late payments, a new directive from the EU could actually make matters worse, according to the FPB.

Many public sector organisations currently have a ten-day settlement target and the forum is concerned that the implementation of a standard 30 day period could cause those bodies to abandon speedy settlement. For example, recent FPB research shows that the NHS pays contractors within 10 days in 90% of cases. On the other hand, some organisations are unable to settle any invoices in 10 days and some struggle to pay 20% within 30 days.

Phil Orford, the chief executive of the FPB, agreed that the Late Payments Directive should help tackle the problem small businesses and freelancers are facing due to late settlement of invoices, which is currently thought to be costing the UK economy £24 billion.

However, he also pointed out that although not all public sector bodies have adopted the ten day payment rule, abandoning it would be a step backwards and could encourage those who currently pay up quickly to increase the waiting period for settlement.

Late payment of timesheets has become a real problem not only in the UK but across Europe as a whole. In Italy, the average public sector settlement time is a huge 100 days whilst private sector companies take an average of 66 days to pay their debts.

The FPB has long been campaigning for legislation to cope with the problem of late payment and the Prompt Payment Code was introduced to help combat the problem. However, signing up is optional and not many large businesses have pledged to settle in full and on time. And many small businesses remain reluctant to take on late payers through fear of losing the contract.

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The latest public body to come under fire for late payment of invoices is the police force.

Despite repeated directives from the government, suppliers to some of the UK’s police forces have to wait over 2 months for settlement at a time when some SMEs are still facing insolvency threats, according to the FPB.

The best police forces settle their invoices within days but there is a huge gulf between them and the worst performers. The FPB say that some manage to settle over 75% of invoices within 10 days and virtually all are paid within 30 days. On the other hand, some forces settle less than 1% of their invoices within 10 days and more than 50% are still outstanding after 30 days.

Meanwhile it has been revealed that SMEs are now accepting excuses for late payment rather than chasing customers with outstanding debts.

A survey conducted by positivecollections.co.uk found that almost three quarters of SMEs accept late payment excuses. 10% of businesses don’t like chasing debts at all in case they lose business in the future and 17% would like to chase up debtors but think it is too expensive to start legal action.

Micro businesses fare reasonably well in the debt recovery stakes with 45% saying they always receive payment on time.

Although there has been an increasing trend towards late payment since the recession took hold, there are major concerns that SMEs cannot afford to suffer this kind of disruption to their cash flow and some may be forced out of business.

Whilst there will always be instances where late payments are unavoidable, this should never be accepted as the norm and businesses and contractors should try and implement measures to keep their credit control in good shape.

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