Your rights

After extensive analysis by the government, involving some 230,000 companies, it was ascertained that on average, UK companies take an additional 27 days beyond the due date to hand over the payment for invoices. This compares with 21 days in Italy, 17 in Germany, 10 in France and eight in Sweden.

Industry observers fear that late payments are likely to get worse with the rise in interest rates and recovery in the economy — factors that make retaining cash for as long as possible even more attractive. The level of late payment comes despite legislation phased in since 1998 that was designed to encourage better payment practice by allowing firms to claim interest on invoices that were not paid on time.

Overall, UK firms take 58 days to pay their bills, half a day more than the figure in 1998 when the legislation as introduced. Over the past six months, larger companies have slowed payments by 0.7 days to 78.5 days while small firms are now taking another 0.6 days to pay up (57 days in total).

One of the principal problems with getting businesses to pay on time, is the assumption that it is a businesses right to pay slowly, after all, other companies are doing it to them.

The Late Payment of Commercial Debts (Interest) Act 1998

Current Figures/Calculation

The late, and non, payment of commercial invoices is the single most destructive chain event for many S.M.E.'s. The answer to such a problem was not to litigate to deter, but to prevent the delay in payment from gathering pace from, say, from 45 days overdue to 120 days: thus becoming a 'bad debt' scenario rather than being 'just overdue'.

There also needed to be a way to focus the debtor, and to some extent the creditor, on the increasing cost of delaying payment to both them and the creditor.

With this in mind, the government brought in the Late Payment of Commercial Debts (Interest) Act 1998 to deal with commercial payment default. As with many government initiatives, getting the message out is arguably the easy part: getting those intended to benefit from the legislation to use it is, by far in this case, near impossible.

The whole issue of charging your customers over and above the invoice amount is akin to poking them in the eye every time they order something. But this is exactly what the government wants you to do. The introduction of late payment interest is not meant to act as a deterrent alone, but as a justifiable way to maintain profitability when your cash flow is not earning bank interest or, more likely, reducing the overdraft facility.

Also, to help foster a culture of prompt payment within the business community. The current status quo for paying invoices is about 45-days from invoice date: this means that for this initiative to have the desired impact, suppliers should insist that all debtors meet the generous 30-day period that they have built into their budget and cash flow.

Timely Action & Cost of Bad Debt Management

The longer a debt remains unpaid, the greater the chance that it will never be paid.

The first step in debt management is to establish at which point an account is no longer classified as being with Credit Control, due to the time and effort required pursuing individual debtors. The primary period for standard collection is 0 - 60 days, 60 days being extreme.

With a company trading at 7.5% profit, with an account overdue for 60 days, c.50% of 'bottom line' profit is eroded.

If payment has not been received by 70 days it is suggested that you take debt management action. By the 60th day Credit Control will have allowed the customer a maximum of two 'cheque runs' or similar allowances. Credit Control, in the period of 60 - 70 days overdue, would escalate the situation to a position where the customer would either pay the account, agree payment arrangements or ensure the customer is in no doubt as to the further action and cost about to fall upon them

Depending of the size of the debt, a director of the debtor should be contacted immediately by a senior member of your company in an attempt to resolve the problem without further delay or cost. Ensure you have a strategy that provides options to litigation. If control is the significant part of credit control, management is the significant part of debt management.