Is the Cheque Still in the Post?

This article appears in our Q1 2023 issue of Finance Transformation Magazine. To download the issue, click here

Martin Nel from Smart Data Foundry discusses the speed of invoice payments to small business after analysing 58m invoices from the last decade and finding that payment performance has improved.

If you ask a small business owner if they get paid on time, I can pretty much guarantee the answer will normally be "no". And that's the common response if you survey business owners or ask for an opinion if invoices are paid on time.

Is it then a surprise to learn that the speed that invoices get paid has significantly improved over the last decade?

The Small Business Commissioner Liz Barclay asked Smart Data Foundry to help understand the issue in greater detail and we were happy to help. We partnered with Sage, the market leader for integrated accounting, payroll and payment systems, who shared de-identified data on 110,000
micro and small businesses and 58 million sales invoices over the period 2010-21.

1. Invoice payment time has halved in the last decade

The headline findings were not what we expected. Invoice payment time has actually halved in the last decade, falling by over 50% from an average of 81 days in 2010 to 36 days in 2020/21.

2. Two out of five invoices are still being paid late

Don't be fooled that the problem has gone away - over the period 2020-21, 40% of invoices paid to businesses like these in the UK were paid late (down from 47% in 2010-13), with 12% over 60 days beyond the agreed payment date.

In 2020-21, the average business in the research had carried approximately £22k of late payments outstanding at any time. This is nearly the same as what businesses in the research were owed that was not overdue.

3. Technology has made a massive difference

Invoice digitisation and improved management of late payments through digital tools have been driving factors for improvement. Gone are the days of elongated paper trails, with payment by cheque and time taken for cheques to clear. Instead invoices are now mainly digital, with the Faster Payments Service enabling instant payment.

A continued focus by successive governments on the issue can also take credit, with the formation of theOffice of the Small Business Commissioner in 2016 and the Prompt Payment Code (PPC), a voluntary code designed to encourage swifter and better payment practices.

This level of insight has been made possible due to the unique data asset Smart Data Foundry is creating by partnering with UK financial institutions to share data safely and securely. Our partnership with Sage made this research possible.

The analysis also highlighted hotspots by industry, geography and size. Public Administration, Transport, Storage, and Quarrying are the slowest sectors to receive payment during 2020-21 , while Northern Ireland has the slowest payment time on average by region as of 2020-21 (c.39 days).

This is the first time that data has been used at this scale to truly understand what is happening once a small or micro business issues an invoice for payment of goods or services.

To protect customer privacy, all of the Sage data was de-identified, and accessed and analysed by Smart Data Foundry in the security of our Safe Haven Research Environment, a controlled and secure service environment for undertaking data research.

Going beyond the traditional approach of research through surveys and focus groups has allowed us to really understand the issue and show that while the position is improving, 40% of invoices are still being paid late to UK small businesses.

When I spoke to Liz Barclay, she was encouraged by the results. Small and micro businesses are crucial to the UK economy, employing nearly two-thirds of the UK's workforce, and are responsible for at least three quarters of innovation, lead the levelling up agenda and are the talent that drives the success of their bigger customers.

This work highlights the issue of late and slow payments. With the soaring cost of doing business, it's more important now than ever to get small firms paid quickly.

When I shared the results with Paul Struthers, Sage Managing Director for UKIA, he was similarly encouraged by the findings and the role that Sage is playing to reduce the time taken for businesses to get paid. He recognises that the impact of late payments is not only an issue for the business and their employees, but also their suppliers and the entire economy.

Sole traders, freelancers and small businesses who struggle to maintain cash flow for their day-to-day business activities because of late payments have an obvious economic impact, but the mental health impact of late payments cannot be overstated. Consistently being paid late causes stress and anxiety for owners who struggle to keep their businesses afloat.

For me, the outcome was a tale of two halves. Knowing that 40% of businesses like these are paid late is a concern for the wider economy as well as the businesses themselves. But understanding that the position has significantly improved over the last decade is extremely encouraging, and, I believe, points the way to future technology improvements.

About the author: Martin Nel

Martin is the Chief Commercial Officer at Smart Data Foundry. His role is to build partnerships with the private, public and third sectors and leverage our expertise and capabilities to harness financial data for social and economic benefit.