The Economic Cost of Late Repayment

If all companies paid their outstanding invoices tomorrow, there would be a spike in economic growth. It would be like the Olympics, or the Jubilee.

Posted by Harriet Davies

URICA Early payment

Fri 26th, Jun

55 billion. That’s how much is outstanding on invoices in the UK, according to a recent survey. That’s around 3.4% of UK GDP. 

To put this into context, because numbers that large mean nothing to anyone but government ministers and the Forbes Rich List, the value of outstanding invoices in the UK is also equivalent to:

• 75% of total UK business investment in assets for the third quarter 2013
• The amount Russia spent propping up its currency between January and October
• The cash on Berkshire Hathaway’s balance sheet (sparking rumours Warren Buffett is predicting a stock market crash)

The figures above demonstrate that a considerable amount of money is owed between businesses. Assuming that money tends to flow – or trickle – from larger companies to smaller ones, currently weaker businesses provide a zero interest loan to cash-rich larger businesses. And this is surely inefficient.

This cash would immediately have a larger marginal impact on hiring and investment if it were paid, because it would go to businesses with a greater need for these things than for storing cash on their balance sheets (the non-Berkshire Hathaways of this world). And because of the multiplier effect, however much of that money was then spent would have an even greater impact on economic growth.

With only one-third of PLCs paying invoices within 30 days , and conditions showing no signs of improving, cash flow is a real problem for UK SMEs, and that means it’s a real problem for the UK economy.

The average business is owed £38k; at £50k one in four business fail. Around one-third of UK businesses have experienced late payment of 90 days or more. Added to this, valuable time that could be spent planning strategy is spent chasing invoices, according to the Federation of Small Businesses.

Taking these factors together, it is clear there’s a lot to be gained by solving the cash flow problem.

This isn’t to berate larger companies; they are businesses that thrived and grew, and it’s great so many are based in the UK. But they have a lot of buying power and they use it. Therefore the finance industry must be creative in finding solutions and leveraging technology for smaller businesses. It must then get the big companies on board with these solutions. Because the whole of industry has a duty to ensure cash isn’t being locked up inefficiently that could be making a difference.

Sources:
http://www.bbc.co.uk/news/business-26673698
http://uk.businessinsider.com/russia-has-burned-55-billion-to-prop-up-the-ruble–and-its-still-losing-2014-10
http://www.forbes.com/sites/investor/2014/08/12/five-stock-ideas-for-buffetts-55-billion-in-cash/
http://payontime.co.uk/credit-management-advice/why-you-should-pay-your-invoices-on-time

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