by Malcolm Harrison, Group CEO, CIPS

Industry View from

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If we are to ensure robust supply chains, SMEs must be treated responsibly

When we think of innovation we think of the big picture – the art of what might be possible, often fuelled by large sums of money and leading-edge thinking. But often that means we don’t look at where else innovation may be nurtured and discovered.

 

For instance, though SMEs tend to get little attention compared to the goliaths of business, they are significant players both in terms of creativity and their contribution to a country’s economy. According to the Federation of Small Businesses (FSB), in 2018 99.9 per cent of businesses in the UK were either small or medium-sized, and they injected a combined turnover of £2 trillion each year into the UK economy. In light of this data, we underestimate the value of SMEs, and how they can progress business development, at our peril.

 

It’s also important to note that the small business of today can become the large corporate of tomorrow. As they grow, they develop their innovative solutions still more, with more resource and larger networks to tap into. If SMEs are so fundamental to the UK economy, they need support from their larger customers, in good times and bad, to remain in business. This support has the potential to uncover any difficulties before they become a crisis, and to create the environment for ground-breaking solutions for which SMEs are known. However, before any of this collaborative effort can even begin to happen, the issue of an SME’s financial stability must come first and is firmly in a customer’s control. In short, SMEs must be paid on time at an absolute minimum.

 

Consider this: as an employee, would you be happy to wait 90 days or more before receiving your salary for that month? According to UK government data, analysed by the Chartered Institute of Procurement & Supply (CIPS), large corporations are not always mindful of the needs of their smaller suppliers when it comes to cash flow. On average, and as the data reveals, large businesses pay almost a third (31 per cent) of their invoices late. Delayed payments, lost payments or payments in part cause huge stress to small businesses and can activate thousands of insolvencies each year.

 

Are SMEs fearful of losing a big customer and reluctant to stand their ground and make a complaint? There is evidence to show that the avoidance of conflict is a big concern. Up to April 2019, the Small Business Commissioner had only received 125 complaints in the 15 months since the post was created, so that is a part of the story. It is a brave SME supplier that questions their large customer’s long payment terms or asks why payment has been delayed yet again.

 

Instead, the corporate customer should take the lead. This issue of late payments has been ignored for too long, and has largely been accepted as the risk of doing business until now. Understanding the negative impacts of late payments, the government is trying to encourage more responsible, and sustainable business, and fairer treatment of SMEs, through the power of a database which logs the details of those companies that are guilty of poor payment.

 

However, transparency around poor payers is not enough. Though some larger corporates were open about their payment processes, CIPS research found that up until April 2019, a thousand larger companies were ignoring the law and not submitting their late payment data, let alone actually paying their suppliers on time. So the issue is likely to be larger than the existing data shows.

 

Without proper supervision of the database itself, the government’s attempt to tackle late payments is minimal at best. More punitive measures are an option, but fines for other misdemeanours, such as environmental pollution, are viewed by the larger behemoths as merely the costs of doing business. The imposition of fines for late payment is unlikely to make much difference here either. Instead, the government’s announcement that it will stop working with serial late payers altogether could be a more significant move that creates that much-needed line in the sand about what is acceptable and what is not. This will only work if that commitment is strong, consistent, and rewards good behaviour so other businesses will follow.

 

Naming and shaming can only go so far. Though openly available to all, the database has not been interrogated as much as it could be to identify the riskier trades, and remains largely untapped by SMEs who stand to gain the most from the data. SMEs working a fine balance between survival and bankruptcy must take some responsibility for how they conduct their business and which customer orders they agree to fulfil. The government database shows who the consistently late payers are, and those that don’t pay at all. A little internet research by an SME into a potential customer is a small price to pay when the alternative could be a catastrophic impact on the future of their business and a brake on impactful solutions that could profit us all. So, the combined efforts of good behaviour from corporates and due diligence from SMEs will create a healthier, more productive working environment.

 

Small businesses are not small fry, but they are important and unique in their contribution to thriving economies and how products, services and cultures develop. In this David and Goliath situation, responsible business should not just be about meeting the terms of the agreement, or “best practice”, but should become business as usual, where SMEs are paid and nurtured to remain innovative and stay in business.

 

A note of caution for any customer who pays their supplier upfront for bespoke work, though, and then finds they go out of business. Due diligence is still essential in every contract. As responsible payment takes a hold, we could even move into the realm of early payment one day, keeping SME businesses alive and kicking, and their creativity flowing in the future. But, for now, we must solve the issue of late payments first and walk before we can run.


For more information on how to manage supply chains responsibly, log on to the CIPS website. 

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