Companies have a responsibility to pay their small business suppliers quickly regardless of the payment terms – or risk a reputational backlash as the cost of doing business puts hundreds of thousands of organisations at risk.

Small Business Commissioner Liz Barclay says she fears that the prediction made by the Federation of Small Businesses (FSB) at the beginning of the year that around 400,000 small businesses could go to the wall this year was “probably a conservative estimate”.

However, prompt payment of invoices could be the difference between life and death for them, Barclay explains. “If you’re a big customer and you owe money to a small business, then you need to pay it now. Not in two weeks’ time, not in 30 days’ time, not in 60 days’ time because the small business may not be there. 

“The talent that is driving your business success sits to a large degree with those freelancers, sole traders, micro businesses and small businesses. You’re shooting yourself in the foot if you haven’t paid their invoices on time,” Barclay adds.

She believes that prompt payment of invoices should fall under the environmental, social and governance banner and that the broader ramifications of failing to pay promptly could come back to haunt companies as customers and employees vote with their feet.

“The way you treat your small suppliers is indicative of how you treat your employees and it’s indicative of your reputation within the community. Boards keep saying it’s an operational issue, but it’s actually a strategic issue and a reputational issue,” she says. How does it sit with investors, as they look at your payment terms? How does it sit with those skilled workers that you’re desperate to recruit? she asks.

“We need boards to be taking that seriously and saying to their CFOs and their CEOs: ‘how quickly do we pay our suppliers?’ We have got to keep those suppliers afloat, otherwise they will simply disappear,” Barclay says.

Cash-flow issues are a thorn in the side for the UK’s smallest companies, as the combination of economic factors and rising costs including inflation, energy bills and wages have created a cost of doing business crisis, she explains. 

“If you haven’t got the cash flow that allows you certainty, you’re not going to invest in jobs, in training. You don’t do anything but hope to survive. There’s a credit crunch and small businesses are not able to borrow. How do you tide yourself over?” she says.

But bearing in mind that these small businesses – employing between 0 and 49 employees – represent 48% of the UK workforce, according to the FSB, the risk to the UK economy as a whole of those businesses failing is huge. “That is too big to fail. We need to get that message across. And it’s going to take partnership working and stewardship to get us there,” says Barclay.

At the same time, the scourge of late payment continues: delayed and unpredictable cash flow is the biggest challenge their business currently faces, according to 62% of SME respondents to a survey commissioned by Vodeno.

Barclay says bad payers need to understand the consequences of their actions – and those consequences are likely to be more serious in the current economic climate. However, some companies are also extending their payment terms, which is exerting disproportionate cash-flow pressure on their small suppliers. 

Often it is these extended payment terms rather than late payments per se that cause an issue. “Sometimes a small supplier will agree to extended payment terms without even realising. It’s only when they feel they’re waiting for an inordinately long period of time to get paid that they discover they’ve signed up to be paid in 120 days.”

Barclay’s advice for smaller businesses is to give themselves the best possible chance to get paid as quickly as possible by being clear on payment terms before they accept work, ensuring that invoices contain all the information needed to be processed and by forging relationships with those responsible for payment within the organisation that they’re working with.

Accountants have a huge role to play in ensuring the appropriate cash-flow management processes are in place, Barclay says. “It may be that there isn’t any other option for filling a cash-flow gap. But having a really tight rein on your cash-flow management is more important than ever.” 

Legislation to speed up the payment process is not coming any time soon, says Barclay. “We have to work with the tools we’ve got.”