For some companies the new payment practices reporting requirements could generate a short-term bureaucratic mess at the least and a major public relations headache at worst.
Brand damage, loss of reputation and bad press are among the major consequences that unwary chief financial officers can expect from the UK government’s new Payment Practices Reporting regulations. To avoid potential mishap, finance teams will need quickly to review their payment strategy, accounts payable processes and overall payment performance, as well as ensure they can accurately capture the necessary data.
This government move is part of a concerted effort to protect small-to-medium-sized businesses and mitigate the insolvency problems that late payments can cause. Effective since April, it aims to build on previous steps like the UK’s voluntary Prompt Payment Code and the European Union's Late Payments Directive.
Who qualifies as a large company?
Not all companies are affected. The qualifying rules themselves are complex, but companies and partnerships will generally need to report if they exceed the following annual turnover, balance sheet or employee thresholds over a two-year period:
Parent companies whose net figures exceed those thresholds will also have to report. And for group businesses, each group member that individually exceeds the thresholds will separately have to report.
Three-part reporting requirement
There are three basic reporting requirements: one narrative about payment terms, one data-driven about actual payment performance, and one statement-led further detailing payment practices.
1) For the narrative part, companies must describe:
2) The data requirement could likely be the most challenging part for companies depending on how they currently gather and report such information internally. Statistics are required on:
3) Finally, the company must provide statements detailing various payment practices. These include
Strategic risk and corporate social responsibility?
So it’s clear that the government means business. For some companies the new reporting requirements could generate a short-term bureaucratic mess at the least and a major public relations headache at worst. This could damage the brand or corporate reputation, either with the public or potential suppliers, and undermine corporate social responsibility initiatives.
The reports need to be filed via an online portal twice each financial year, beginning from April 2017, when the portal went live. Those companies meeting the criteria whose financial year began in April can therefore expect to be among the first to report this October. This may also be when press reports start to appear, naming and shaming any corporate household names for poor practice.
So, it will pay to take a thorough look at payment practices so that, if necessary, there is a strong story to tell, particularly when it comes to how you deal with smaller suppliers. With this in mind, it might also be wise to work on a proactive media strategy at the same time, and not only focus on the operational issues.
What can you do?
In addition to examining standard payment terms, payment practices and ensuring the systems are in place to generate the necessary reports in a timely fashion, the payment reporting protocol presents a timely opportunity to consider fresh approaches that will contribute to a payment performance that stands up to public scrutiny.
Fundamentally, paying suppliers earlier is the clearest way to reduce days payable outstanding (DPO) so that your reported average looks fair, whether to potential suppliers or a scandal-hungry journalist looking for a corporate scalp.
Dynamic discounting reduces DPO
Paying early isn’t always possible. But when companies have excess cash, dynamic discounting is a way to average down DPO while also realizing a business benefit for the treasury function by generating risk-free returns on that cash.
By contrast, supply chain finance won’t reduce DPO from a payment reporting perspective and also requires the supplier to enter into a relationship with a financial intermediary. Buyer-funded dynamic discounting avoids this and reduces DPO when it comes to the duty to report. It generates much the same working capital benefits for the supplier, with buyers gaining APRs of up to 10 percent or more on those cash surpluses.
So, for finance teams the payment reporting regulation offers a useful excuse, or even a pressing justification, to push through the introduction of improved accounts payable processes to ensure invoices can be paid early. When cash is in surplus, dynamic discounting both reduces DPO and supports suppliers working capital position, which is the end goal of the duty-to-report legislation. It allows you tell a better story about your payment practices while generating extra risk-free returns on cash and reducing cost of goods sold.
A note on compliance
For many companies, generating the required reports to comply with the new regulation will be far from trivial, with most ERP systems unable to easily surface the relevant data. In contrast, Xelix’s platform gathers this information over time and can therefore auto-generate these reports in a matter of clicks.
If this is something we can help you with, please do get in touch below.
Alternatively, you can find more information in our full whitepaper.