Truth and Potential – The Prompt Payment Code

There is no silver bullet to ensuring money filters down a supply chain in good time. As Advocate sees daily, the burden of late payment sends shockwaves both upstream and downstream. Our job as a debt recovery firm is to get the stream unblocked so you can pay suppliers, staff and overheads. When applied in the spirit intended, the Prompt Payment Code (PPC) reduces the chance of financial fatbergs upstream. However, the PPC is not a cure for all ills or a substitute for instructing a third-party debt collection agency such as Advocate.

What is the Prompt Payment Code?

The PPC lays out standards on how buyers communicate with sellers in the supply chain and sets a maximum invoice to payment time frame. The PPC is designed to benefit all businesses but particularly those most vulnerable to late payment such as sole traders and SMEs. There are currently over 3,600 private and public sector organisation signatories to the PPC. Its membership base continues to grow year on year since being launched in 2008. The Chartered Institute of Credit Management was the original custodian of the PPC until the Office of the Small Business Commissioner (SBC) public body was created in 2017. It remains a voluntary code gaining notable traction throughout the pandemic.

In 2021 the PPC was strengthened with tougher targets, namely 1) paying at least 95% of SME invoices within 30 days, 2) paying at least 95% of invoices raised by large businesses within 60 days, 3) signatories to formally recognise the right of suppliers to recover statutory late payment charges if invoices are paid late without justification, and 4) suppliers to have a dedicated contact point for payment queries. The PPC still contains requirements on how disputes are resolved; making sure clear guidance is easily accessible to suppliers, and avoiding any practices which negatively impact the supply chain. The PPC can make a credible difference to the survival of Small Businesses (less than 49 employees) who are themselves responsible for employing approximately 47% of the UK’s workforce.

A Cautionary Tale

It is hoped suppliers will offer PPC members favourable rates in view of the commitment to paying invoices on time. Some of our clients have gone so far as to replace early payment discounts with lower rates for PPC signatories. The litmus test of any business initiative like the PPC is to evolve in harmony with the wider economy. In other words, we must always be going forwards because we can’t find the reverse – admittedly without Klingons on the starboard bow! The PPC has evolved since its launch. The SBC as custodians is responsible for keeping it relevant. Critics argue that to enable a shift in payment culture, mandatory sign up and mainstream advertising is required at the very least. Latest government figures classify 99.2% of British businesses as Small. This segment stands to gain the most from others signing up to the PPC. Of the remaining 0.8% Medium and Large businesses (more than 50 employees), only 8% have signed up in the 14 years since the PPC was launched. That’s circa 0.06% of all businesses in the UK. Whether you think cautionary tales such as this discredit the goal of the PPC or highlight its potential, one thing is clear – for the PPC to truly benefit small businesses, it must be taken up by the majority of the 0.8% who create 68% business turnover.

Forwards Backwards, Up and Down Over the PPC!

Once a company has signed up to the PPC, its continued membership is not guaranteed. Although the sign-up process is relatively straightforward, meeting the criteria can require changes to systems, processes and staff training. Suppliers can easily complain about signatories which gives them a voice that would otherwise go unheard. The last thing a signatory wants is to be hauled up in front of the Compliance Board. The PPC took a big step forward in 2019 when it first made public signatories who were suspended or removed. This was part of the SBC’s transparency drive. Nine out of the eleven firms suspended in 2019 and reinstated a few months later, operated in the construction industry. With more construction firms now signed up to the PPC, small businesses are starting to see a seismic shift in how quickly payments filter down.

In June 2020 telecoms giant BT PLC, IBM’s UK subsidiary, and builders merchant Screwfix were reinstated to the PPC. The following month Anglo American’s UK holding company was also reinstated having been suspended eight months prior. To regain compliance the metals and mining firm introduced a new accounts payable system. They also overhauled the invoice query process. All four firms worked quickly to regain their status as PPC compliant. In August 2020 Kier IS, Shell UK, and FM Conway were reinstated to the PPC with the latter two having only been suspended in January. All three firms worked with the SBC to ensure renewed compliance. Kier has reprioritised its payment profiles, Shell UK enhanced their creditor payment process, and FM Conway changed their payment process alongside reducing some creditor payment terms. Also suspended in January 2020 before reinstatements were Bottomline Technologies and two BAE Systems subsidiaries.

The two biggest removals from membership so far in 2022 are Diageo and Unilever UK. Multinational beer and spirits producer Diageo had the signatories of four UK based subsidiaries removed. Information reviewed by the Compliance Board indicated the subsidiaries paid 33-51% of invoices within 60 days. Similarly, consumer goods conglomerate Unilever UK was removed with 51% of invoices being paid within 60 days. There is no reason to think Diageo and Unilever UK won’t return to the PPC. Understandably the exact reason for a reduction in payment performance rarely enters the public domain. Whilst that doesn’t help small businesses not to worry, investors are unlikely to lose sleep over it.

Past Present Future

For a small business, the costs of achieving PPC compliance can be insurmountable. The PPC is designed to benefit 99.2% although surprisingly there are a couple of small business signatories. For larger businesses, the ease of achieving PPC compliance is dependent on the systems and processes already in place. As boardrooms become more accountable for the social and environmental impacts of trading, the need to pay suppliers on time has also come into view. Alternatives to the PPC have informally existed for generations. We’re not talking about failed government gimmicks and dull advertising campaigns. We’re talking about Accounts Payables (AP) taking the initiative to streamline processes and upgrade systems to benefit suppliers as much as it does themselves. Taking a hundred calls a day from creditors pleading for payment through no fault of their own is not what any AP manager wants. The PPC seeks to fix what has been knowingly broken for decades. Unlike its predecessors, information is clearly written and easily accessible (see https://www.smallbusinesscommissioner.gov.uk/ppc/ )

The Late Payment of Commercial Debts Regulations hands creditors power to recover the cost of instructing third party debt collection, to the point where they are no longer out of pocket. It is enshrined in law and cannot be opted out of. As a voluntary code, the PPC is more reliant on riding the commercial coattails of a fairer society drive than an instant rise to fame through legislation. The PPC has already proven it is no tick box pushover (unlike lesser eco-initiatives). It has genuine substance and as Advocate bears witness, the PPC can be a good additional proverbial stick to beat the debtor with when they fane ignorance!

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