Insights, Accountancy

Let it flow: How accountants can use Faster Payments to help businesses recover from COVID-19 

Tom Kelly By Tom Kelly on 29 July 2020   •   8 mins read
<span id="hs_cos_wrapper_name" class="hs_cos_wrapper hs_cos_wrapper_meta_field hs_cos_wrapper_type_text" style="" data-hs-cos-general-type="meta_field" data-hs-cos-type="text" >Let it flow: How accountants can use Faster Payments to help businesses recover from COVID-19 </span>

Accountants and businesses across the UK are facing unprecedented financial times. GDP shrunk by 5.8% in March 2020, smashing all previous UK records for a monthly decline. The Bank of England predicted a contraction of 14% across 2020, which would be the worst annual performance since The Great Frost paralysed a primarily agricultural economy in 1709.  

 The speed and strength of the UK’s economic recovery will be determined by many different factors. 

But one area of focus for accountants should be enabling their clients, especially small businesses, to make and receive payments faster. This would boost economic activity in general, but it would also enable businesses to get a stronger grip on their cashflow and reap multiple business benefits. 


Late payments and sluggish cashflow are holding businesses back 


The cashflow problems and operational disruption caused by late payments are all too familiar to most business managers or owners and their credit controllers. The government’s Small Business Commissioner, set up in 2017 to address this issue, estimates that one in three payments due to small businesses in the UK is late; and that if all small businesses were paid on time this would boost the economy by £2.5 billion per year.  


Research completed by Bacs in 2019 uncovered even more startling figures. It estimated that the total late payment debts to small businesses that year reached £23.4 billion – almost double the equivalent figure for the previous year. Chasing those debts was costing those businesses £4.4 billion per year. Almost eight out of ten businesses (78%) were waiting for one month or longer beyond agreed payment terms; nearly half (45%) were waiting two months or longer. 


When the government ran a consultation addressing this issue in 2018, the most common negative effect cited by businesses was that poor cashflow discouraged them from taking on new staff or investing in new equipment. One in three businesses (34%) said late payments had forced them to use bank overdrafts, 19% had taken out loans and 9% used invoice financing to cover the gap – all measures that increase costs.  


It’s a misconception that these problems are entirely caused by larger businesses treating small businesses badly. Late payment is a broader, systemic and self-perpetuating issue caused by sluggish cashflow. One in four respondents to the 2018 consultation said that waiting for late payments had forced them to pay their own bills late; and the 2019 Bacs research showed that eight out of ten late payments due to small businesses were owed to them by other small businesses.  


So even at the best of times, the economy is weighed down by late and delayed payments, with cashflow problems also responsible for stifling growth and stalling job creation. They are restricting productivity, reducing tax revenue and increasing the incidence of insolvency. And in 2020, the lockdown recession is exacerbating these problems. 


Government initiatives to speed up payments are falling short 


AI technology firm Sidetrade tracks the payment behaviour of 3.7 million businesses in Belgium, France, Italy, the Netherlands, Spain and the UK. Its findings show that UK businesses have the highest percentage of invoices that are still unpaid more than ten days after payment was due (39% - the lowest national figure, for the Netherlands, is 18%).  


The UK government has taken some steps to address this issue. In March 2019, it announced that company audit committees will now be held accountable for poor payment practices. In June 2019, it gave the Small Business Commissioner new powers to issue fines and impose binding payment plans on late paying businesses. These measures will help to some extent, but slow or late payments will continue to cost businesses huge amounts of time and money 


But even when bills are able to be paid, both manual approval processes and the built-in three day delay in Bacs still impede the flow of money, making it difficult for businesses to obtain an accurate view of cashflow and their true financial position. This is a key reason why investments in new equipment, or in people, are delayed or ruled out. Inadequate cashflow forecasting leads to a whole indirect cascade of business impacts, including lower productivity, lower staff retention and lower profits – and thus to lower tax receipts and slower growth. 


Further government action, including more power for the Small Business Commissioner and more rigorous encouragement for businesses to sign up to and comply with its Prompt Payment Code would help. But businesses and accountants can also help to reduce the number of late or slow payments by using technology that facilitates faster payments and gives businesses a clearer view of cashflow.  


Harnessing Faster Payments to improve cashflow control and visibility 


One step businesses can take is to use the UK’s Faster Payments scheme for any payment of up to £250,000 (or in accordance with an individual bank’s agreed limit). The payment, which is contracted to be processed in under two hours, is now often paid in seconds, at a scheduled time that suits both parties. Payments can be made at any time, while Bacs payments can only be made during business hours. The scheme will also very soon benefit from the Confirmation of Payee industry initiative, which is a quick and effective automated anti-fraud check on each payment. 


However, gaining effective access to Faster Payments is another issue entirely. It’s not always easy, especially for small businesses, to take advantage of the scheme. And this presents an important opportunity for accountants. Previously the luxury of big banks, the regulators have opened up the scheme to select non-banks to stimulate competition and innovation. Accountants can work with these entities to gain access to Faster Payments and pass the benefits on to their clients. 


Modulr is one such non-bank to be directly connected to the Faster Payments Scheme and hold a settlement account at the Bank of England. This means we can provide accountants and their clients with direct access to Faster Payments as well as a powerful payments engine, without the reliance on third parties or legacy banking systems prone to outages. 


Through automation, the Modulr engine can accelerate not just the movement of funds but also the payment approvals processes on both sides of the payment. We’ve entered the accounting market to combine our direct access to Faster Payments with dedicated accounting tools like Sage Salary and Supplier Payments, that help speed up accounting processes, giving accountants a much more accurate view of their clients’ cashflow – valuable insights which enable accountants to offer a richer service 


Modulr is also building the UK’s first Payments Dashboard for accountants that will enable them to manage all clients’ workflow from a single portal, whichever accounting software the client is using, for quick and easy insight into holistic cashflow for each client and individual payment drilldown 


Accountants that can more effectively forecast their clients’ cashflow, pay their bills faster and help them negotiate better terms with their suppliers will be in high demand. All in all, Faster Payments combined with consolidated and automated management of payment flows gives accountants greater visibility of their clients’ business cashflow and a clearer, much more immediate picture of their true financial position. 


Payments technology to help revive the UK economy 


Politicians have been promising to address the issue of late payment for decades, yet businesses are still being driven into insolvency because late payments have strangled their cashflow. Perhaps technology that facilitates better management of cashflow now offers the most effective way to resolve this problem and minimise the number of insolvencies caused by the current crisis? 


Payment innovations like those being developed by Modulr will help accountants to support their clients, especially small businesses, through the difficult times ahead. It will help businesses of all kinds to make (and save) money; to create and safeguard jobs; and could ultimately help the economy recover from this crisis.  


It’s true that further challenges lie ahead: in 2021 after years of speculation and argument, we will finally discover the true economic consequences of Brexit. But automated, secure yet fast payments systems give businesses the ability to understand and forecast cashflow more effectively, meaning they can grasp commercial opportunities as they arise and make better strategic decisions 


To summarise, there’s never been a more urgent time for accountants to: 


  • Identify your clients’ cashflow painpoints such as late or slow payments. 
  • Evaluate whether Faster Payments or Bacs is more suitable for your clients’ needs. 
  • Use automation to speed up payment flows, approval processes and reconciliation.  


An economy built on businesses able to take control of their cashflow will be in a much better position to recover from the current crisis and to withstand whatever challenges lie ahead in the post-COVID-19 world. And accountants, supported by the right payments technology, could play a key role in helping businesses achieve this. 


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