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The problem with prudential payments for small businesses, and how to solve it

Written by Glen Foster on Friday, 19 November 2021. Posted in Financial management, Finance

Late payments are the scourge of small businesses. The decades-long crisis causes irreparable damage to a huge number of firms, who are forced to wait to use money they have already earned and invoiced as customers drag their heels.

The problem with prudential payments for small businesses, and how to solve it

Late payments are the scourge of small businesses. The decades-long crisis causes irreparable damage to a huge number of firms, who are forced to wait to use money they have already earned and invoiced as customers drag their heels. Small firms often don’t have the luxury of financial security, and so prompt payments are vital to their survival. However, Xero research found that 59 per cent of small business owners experienced big business customers increasing payment terms during the pandemic. 

We need small firms to grow and create jobs, they are the backbone of our economy. But they won’t be able to do this if they aren’t paid on time. In fact, European Commission research found that eliminating late payment in Italy, Spain and Portugal would reduce business exits, equating to up to 248,000 additional enterprises staying in business each year. 

So where do you start in addressing an issue as ingrained in society as late payments? We recently formed a UK task force of experts to find new solutions to this crisis. One such solution is reframing prudential cash flow management – where firms delay paying to conserve cash – and late payments as 'unapproved debt'. Here, we look at why redefining the way we talk about the issue could help create cultural change.

What are prudential payment practices?

Prudential cash flow management occurs once the customer’s accounts payable team has received the invoice. The next step is to release this invoice for payment. But when? This depends on the customer’s payment terms and business practices. Unfortunately, this is where prudential cash flow behaviours can creep in – like encouraging late payment, or imposing long payment terms. This benefits the customer, but can be make or break for small business suppliers. Sadly, a huge number of bigger businesses not only practice prudent cash flow management, but consider it “best practice”. Take Carillion, for example. The construction company had standard terms of 120 days, and still paid late. 

While invoice financing is now essential for many small firms, other options are not ideal. Management can consider legal threats or claim interest from customers who pay late. But in an already challenging environment, small businesses can’t risk endangering relationships. Despite new technology that makes it easier than ever for businesses to pay suppliers on time, many are still dragging their heels. So, what else can be done to break this unacceptable behaviour?

Redefining late payment language

For many large businesses, it is company policy to delay payments. With this in mind, it should not be small firms’ responsibility to tackle the issue. They are victims, not perpetrators. Instead, we must challenge the idea that this can be viewed as best practice or acceptable culturally. One way to do this is by reframing prudential payments. ‘Prudential’ implies a reasonable decision to cut costs – this is an unfair reflection of an irresponsible practice. Put bluntly: by delaying payments for goods or services already acquired, these firms are using someone else’s money without permission. 

With this in mind, our task force proposes that late payment or prudential payments be renamed as “unapproved debt”. Reframing this language challenges the institutionalised acceptance of late payments, and in turn makes them faster.

It’s far more uncomfortable for big businesses to talk about or report on the ‘unapproved debt’ they hold, than ‘prudential’ cash flow management. If the wider business community starts framing it in this way, it will help empower small firms to have more honest conversations with customers. Late payments will not be solved overnight. But assigning harmful practices accurate labels that reflect the damage they cause would be a good start. It is a movement we are proud to be a part of. 

About the Author

Glen Foster

The seventh Xero employee in the UK, Glen has over 15 years’ experience in the accounting and small business technology industry. His role is to develop and execute strategies that enable our accounting and small business communities to flourish.

Glen is passionate about the role technology plays in moving the accounting industry forward as well as the impact it has on small business.

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