Small and medium-sized businesses that supply Tesco supermarkets will receive their payments within 14 days, the supermarket’s CEO has promised. We spoke to the head of one of the UK’s largest invoice finance companies to find out how this change will affect SMEs.
‘We want to work with suppliers’
Speaking at the IGD conference, Tesco CEO Dave Lewis addressed the problem of late payments by committing his supermarket to a new standardisation policy, whereby its small suppliers will be paid in full within two weeks of making a delivery, with the policy coming into force in June 2016.
‘‘One of the things that made Tesco great was the little things we did to help our customers. We want to work with our suppliers to get back to innovating on behalf of our customers and these changes will make it easier for us to do that. Our customers want value, great availability and new choices,’’ stated Lewis.
The supermarket chief made the statement during one of the toughest periods in the company’s history. Lewis recently announced a 55 per cent loss in profits during the first half of the financial year as he looks to turn Tesco’s fortunes around.
‘‘To help with this process, we’re announcing the standardisation of our payment terms. By introducing a new standardised policy across each category for our larger suppliers, and shorter payment terms for our small and medium suppliers, it will help us to deliver a fairer, more transparent and consistent approach across our supply-base,’’ continued the CEO.
The change means that smaller suppliers who deliver up to £100,000 worth of products in a year will be paid by Tesco 34 days quicker than before. Medium-sized suppliers who deliver up to £10 million in product value per year will have their accounts settled five days quicker than larger suppliers in their category.
Check out this table detailing which businesses will fall into the standardisation policy.
Late payments cost SMEs £10bn a year
This will come as good news to thousands of small businesses who have been plagued by late payments. In July, SME Insider discovered that small businesses in the UK are spending on average £10.8bn a year in an attempt to recover overdue payments.
Nearly two weeks after the report was published, the government responded to the late payments epidemic by announcing that they would appoint a new small business commissioner, whose role would be to specifically cut down on late payments.
This is a problem that really needs to be sorted quickly. A report commissioned by business recovery specialists Begbies Traynor found that supermarket price wars and late payments were the two biggest factors attributing to the closures of small suppliers.
Tracy Ewen, managing director of IGF Invoice Finance, believes the policy change will help small suppliers in the long run.
‘‘Immediately there will be no change to SMEs as the policy doesn’t come into effect until June 2016, which is a real shame because of the busy Christmas period that is coming up, which usually drains a small business in terms of cash flow,’’ explained Ewen, who spoke exclusively to SME Insider.
‘‘But I think in time the change will aid the small end of the supply chain and I believe it will give small business owners more confidence in doing business with large companies.’’
‘‘Tesco has done a very good PR job with this announcement and I actually applaud them for being one of the first companies to take a stand against late payments, and going much further than the late payments standards that are demanded by the government.’’
When asked whether firms of a similar stature should follow Tesco’s lead and cut down on late payments, Ewen went a step further by proposing that every company in the UK should immediately be changing its relationship with suppliers.
‘‘I think that when you get a major retailer like Tesco’s changing their policies, it sends a message out to the market that their competitors really can’t afford to ignore. If you were an owner of a large supermarket, would you really want to be in Tesco’s shadow and not be cracking down on late payments?’’
‘‘So I suppose the difficulty for other retailers is how are they going to sell this idea to their shareholders? By changing their policies towards paying suppliers, it will have a trickle-down-effect, potentially causing problems for companies’ accountancy teams.’’
‘‘In an ideal world, this announcement from Tesco’s should force everyone to pay their bills on time, starting with the government.’’
What can SME owners do to avoid late payment problems?
Ewen gave some sound advice to SME owners who are worried about receiving their money late.
‘‘It sounds really simple, but the first thing every SME owner should do is to make sure their paperwork is correct before handing it over. You see an awful lot of payments not being made simply because it hasn’t been applied for properly.’’
‘‘One of the biggest things every small business owner needs to do is to maintain a good relationship with your customers. If you’re on good terms with your clients, you can easily ring them up to try and get to the bottom of the problem.’’