Oxygen Finance’s response to new government initiative
Business secretary, Sajid Javid, today pledged to tackle the problem of late payment of SMEs by announcing a new enterprise bill, which will introduce a small business conciliation service. The bill will be announced formally in the Queen’s speech at the state opening of parliament on 27 May. The new body will help settle disputes between small and large businesses and is designed to help businesses “avoid expensive legal costs and maintain business relationships by reaching mutually satisfactory agreements”.
Mr Javid explained: “There’s a situation familiar to small business owners up and down the country. A letter turns up from a larger customer changing payment terms, or charging them to remain a supplier and in some cases even deducting that charge on the spot against payment owed. This pattern of behaviour is an outrage. It’s bullying – pure and simple.”
Oxygen Finance believes that Mr Javid is right to focus on the subject of late payment but that government intervention will only go part of the way to solving the issue. The real progress, according to Oxygen Finance, will come from a shift in focus from legislation to incentivisation.
Roberto Moretti, CEO, Oxygen Finance Ltd, comments: “The business pages of the UK media continue to be filled with stories of late payment and how SMEs in particular are negatively affected by the poor payment practices of large buyers. I have met a huge number of large corporations and public sector bodies in recent months and can honestly say that – with few exceptions – I do not believe they are paying suppliers late on purpose. I’m therefore not sure whether additional legislation will have the desired effect of driving more liquidity into our SME community. Suppliers already have recourse to legislation which entitles them to late payment penalties, however very few choose to go down this route for fear of impacting upon valued relationships and losing future business opportunities.”
“In my view, we need to provide large buyers with the tools needed to allow them to prioritise the focus on this area”, says Roberto Moretti. “This involves greater analytics on a real-time basis to highlight problem areas and help processes to become ‘unblocked’ as well as aligning the overall business objectives with the buyer’s CSR agenda, areas which are not always in tandem. The efficiency created in this way will only manifest itself where the buyer is incentivised to do so.”
He continues: “For this reason, I believe that running an early payment programme with supplier rebates alongside a wider ‘prompt payment’ initiative will deliver the desired outcome and create a better payment culture. This approach, which ensures that all suppliers are paid to contracted terms where they are not participating in the early payment programme, is the only way to drive this behavioural change.”
In an article published in Financial Director this week, “The Rules: Pay late? Be publicly shamed”, Gerard Chick, chief knowledge officer at Optimum Procurement, outlined the far-reaching consequences of the new regulation for FDs / CFOs:
“Finance directors will be required to publish a quarterly report on their website and, in the case of groups, on an individual rather than consolidated basis. It will be finance directors who are responsible for ensuring that the reports are prepared and accurate, and if they fail to take all reasonable steps to secure compliance, they will be committing a criminal offence and may be fined.”
The article goes on to highlight the large number of additional practical tasks that will fall under the CFO’s remit and the mounting pressure to establish and prove compliant processes. There are clear benefits to compliance, citing the opportunity to spot “current weaknesses, inefficiencies and risks to which they don’t want exposure”.
The piece also acknowledged that supply chain innovation is the key to enabling the business to pay on shorter terms and maintained that moving from a one-sided relationship to a more collaborative process is an essential starting point. It concluded that CFOs should conduct a health check “in order to avoid their organisations becoming known as bad for business.”
Roberto Moretti, Chief Executive at Oxygen Finance Ltd, added: “This article highlights key reasons why CFOs are starting to place their preparations for the new regulation very high on their agendas. With reputational risks at stake, potentially very substantial fines for non-compliance and the opportunity to gain enhanced visibility, CFOs are recognising that it is critical to act now to ensure they have the necessary steps in place.”
Further details of the forthcoming regulation are contained in our previous news article: “Government to make large companies publish payment practices”.
There was strong delegate interest at the joint stand ran by Capita Procurement Solutions (CPS) and Oxygen Finance Ltd (Oxygen) at the Scotland Chartered Institute of Public Finance and Accountancy (CIPFA) conference, held in Glasgow in late March this year.
Attending the CIPFA Scotland Conference were delegates from across local and central Scottish Government, as well as representatives from the third sector.
Delegates from a diverse range of public sector organisations were able to talk to the Oxygen and CPS representatives in between workshop sessions, with many follow up appointments being requested during the two days.
In addition to the stand, Oxygen Chief Executive, Roberto Moretti, was invited to present the Oxygen Finance Early Payment Solution to the Chief Finance Officer’s Forum, a well-attended forum held prior to the main conference. Anne Ryans, Interim Director of Finance for Oldham Council, and client of the Oxygen Early Payment programme, was also in attendance and able to demonstrate, not only the financial benefits of the programme, but also the qualitative benefits, such as a more motivated work force and tighter, more efficient, financial and procurement processes.
Reflecting on the conference, Simon Whittle, Oxygen’s Client Services Director, commented;
“As a fast growing company with many clients within the public sector, the Scotland CIPFA Conference provided us with a superb opportunity to build relationships with the Scottish public sector, especially having recently signed contracts with Aberdeen City Council to enable them to enjoy the benefits of the Oxygen Early Payment programme.”
“The feeling from ourselves and our partners at Capita was one of having started a very positive journey as we build on the contacts made and look to establish long term relationships and partnerships with many of the conference attendees.”
The partnership between CPS and Oxygen is one of a programme of partnership arrangements, with a variety of complementary organisations, to develop and deploy Early Payment Solutions for any organisation that may benefit from paying their suppliers early. These could be both within the public and private sectors.
If you would like to discover more about how an Early Payment Solution can benefit your organisation, the conference handout is available for download here.
Following a consultation by the Department for Business, Innovation & Skills (BIS), the government is to bring forward legislation to make large companies publish information on their payment performance and practices. This would come into force from April 2016, making prompt payments a major reputational issue and outlawing the late payment culture which has been the blight of British business for so long.
The policy has strong cross-party support and it is thought that the legislation will be driven forward, irrespective of the election result in May.
Under the new rules, large companies will have to disclose their payment terms, the average time they take to pay their suppliers and the proportion of invoices paid beyond agreed terms, with invoice payments reported according to the following time-bands:
Additional reporting requirements include the average time taken to pay, the proportion of invoices paid and any late payment interest owed and paid.
The new reporting requirements also mean large companies will have to declare publically whether financial incentives are required to join or remain on supplier lists. It is also proposed that a new payment portal will be created to enable data to be collected on dispute resolution processes, e-invoicing, supply chain finance and preferred supplier lists.
It will also be mandatory for Companies to report on membership of the government-backed Prompt Payment Code, recently strengthened to promote 30-day terms as standard, with a 60-day maximum limit.
High street chains, including Morrisons and Marks & Spencer, have launched strong-arm schemes that deliberately set out to delay payment of SME supplier invoices.
Hard-pressed small suppliers are now being forced to wait a month longer to receive payment from these large, powerful chains. If the suppliers are unable to live with these delays, the supermarket chains are then offering them access to bank credit, on which interest is charged. This aggressive practice has left many SMEs fighting to survive, rather than thrive.
Phil Orford, chief executive of the Forum of Private Business, referred to this approach as an “ethical deficit at the heart of some of Britain’s most well-known companies”. He went on to say, “Their apparent collusion in this area threatens to break the backbone of the UK economy – small businesses.”
Roberto Moretti, chief executive officer at Oxygen Finance Limited, comments: “Extending payment terms in order to create working capital at the expense of your supply chain is a very outdated way of approaching your business. The financial value that you generate is small, especially when compared to the strain you are putting on your supply chain and particularly on those smaller suppliers who desperately need cashflow to keep their business moving forward.”
“We would encourage large buyers to spend more time to understand their supply base and work with them as ultimately these suppliers are the ones who will innovate and drive greater value for all. Paying suppliers early helps to deepen buyer-supplier relationships and ensures that the supply chain remains healthy”, he continues.
“At Oxygen, our approach is to work with buyers, understand their business drivers and then create a value-add proposition that works not only for them but also for their suppliers. This methodology ensures that everybody continues to believe in the relationship as ‘win-win’ and there is not the bad taste that has become associated with other programmes, where the underlying payment terms are extended.”
Roberto Moretti, chief executive of Oxygen Finance, is working with a number of local authorities across the country, including Barnsley, Croydon and Oldham, to generate better cashflow within local communities through early payment programmes. Oxygen Finance focus on councils establishing a better relationship and payment scheme with their own suppliers.
He said: “If you had said to me five years ago that the chancellor would be talking about the importance of payment terms in key budget speeches, I wouldn’t have believed you. But it is a topic that has rightly sprung to the top of the agenda – and we know will feature in party manifestos for the forthcoming elections.
“Local authorities and SMEs are under the financial thumb like never before, so it is hugely important for them to work together and create quicker cashflow and build the relationship between council and supplier. In places like Barnsley, Oldham and Croydon, councils have taken the lead and this has already led to the creation of jobs in the area, as well as helping to protect frontline services through critical savings.”
Mary Glindon, MP for North Tyneside, has warned councils that late payments to businesses will soon begin to hurt them financially, highlighting that forthcoming UK and European legislation will force authorities to pay within 30 days or face financial penalties.
In addition, Mrs Glindon, a member of the House of Commons Communities and Local Government Select Committee, stated that Councils will be required to publish their payment performance in detail – including any penalties incurred – regardless of whether the amounts in question have been paid or not.
Estimates by Oxygen Finance indicate that a typical upper-tier Council could face an annual liability of between £300,000 and £750,000 if they fail to comply with forthcoming legislation.
Glindon referred to the issue as a “Ticking time bomb facing our Councils” and has likened it to the “equal pay for equal value legislation, whereby Councils who were not ahead of the game faced serious financial costs.”
Underpinning Mrs Glindon’s message is a clear call for urgency: “Councils need to prepare now for the forthcoming changes which, in any event, are vital for local businesses in their areas and will help boost economic growth by addressing the cash-flow crisis.”
Oxygen Finance has played its role in the debate for many months; at Westminster Hall on 22nd July, Mary Glindon cited the company specifically as a successful early payment vehicle being implemented by many Councils already.
Roberto Moretti, Chief Executive of Oxygen Finance Limited, believes the legislation will have a dramatic effect on small and medium sized businesses; he comments: “The legislation is hugely positive for SMEs, both ethically and financially and the effects will ripple across the business community, enabling businesses of all sizes to pay their own suppliers earlier.”
Mr Moretti continues: “Acting in partnership, our Early Payment programmes help Councils comply with incoming legislation and improve payment performance. The Oxygen solution generates a new income stream for Councils in addition to providing the strength and depth of resources they need to implement changes which are of direct benefit to SMEs and the local community.”
The need for early payment by local authorities to SMEs has been widely reported by the financial and business media. Further reading is available at:
Labour MP for North Tyneside, Mary Glindon is among a growing number of politicians to express concern at the late payment of invoices to SMEs.
At a debate held at Westminster Hall on 22nd July, Mary Glindon MP cited Oxygen Finance as an example of a successful early payment programme being implemented by councils today. Furthermore, the speech raised the question that “early rather than prompt payment is what matters”.
In The Independent this week, a story ran with the headline that ”Small businesses struggle to get paid – and too often the culprits are big businesses and councils”.
Small and medium-sized enterprises are today owed a staggering £39.4bn in overdue invoices, according to recent research conducted by Bacs. Six in ten small businesses are owed late payments and the average small business is currently owed £38,186 in overdue invoices.
Recent research from Professor Nick Wilson of the Credit Management Research Centre has found that the UK is entering a period of economic recovery, hampered by an unprecedented £75 billion trade credit gap – almost £94 billion more than the last recovery.