Notice

Payment and cash flow review: terms of reference

Published 3 December 2022

Small Businesses are the backbone of the UK economy. Small businesses fix our homes, our cars, and our property, help look after our environment, make and sell innovative products, provide food, meals, holidays and entertainment, train and support us in sickness and health, look after our children, and much more besides. Small businesses are the UK – extraordinary, and every-day - without them our modern busy daily lives would not be possible.

Being a small business owner can be as challenging as it is rewarding. Delivering a great service or product, with the potential to generate a profit, is not enough to guarantee a sustainable business. Success - or even survival – depends on cash flow.

Businesses need to make sure they have money to operate from day to day. The sustainability of a business relies on the cash they have left over, after accounting for the money coming in and going out, during any given period. Does the business have enough cash on hand to pay its staff, buy stock, pay creditors? Is there enough money left for the small business owner to pay themselves a salary? It is these issues and more, affecting the cash flow cycle of a business, that preoccupy the small business owner on a day-to-day basis.

When small businesses are not paid by the due date, or feel forced to accept long payment terms, this:

• hampers business growth, as they do not have money to buy inventory stock, equipment, or invest in their future (planning, growth, training)
• affects the amount of cash they have available to pay the bills and wages, and their liquidity, which in turn, affects their sustainability and possibly their viability

This is particularly the case for smaller businesses that do not have large balance sheets and cannot accommodate long payment terms or delays to receiving payment within their cash flow cycle. Late payment remains a significant problem for small businesses across the UK, particularly at this critical time for the UK’s economy.

Purpose and scope

The Payment & Cash Flow review will take a broad approach and set out the issues from the point of view of small businesses. It will gather information and draw conclusions in the following areas:

Transparency and Advocacy: The review will make recommendations on the role of the Small Business Commissioner, the Small Business Minister and BEIS in holding businesses to account for payment practice. As part of this, we will examine how government and external partners could make better use of published data to improve transparency and the payment performance of specific sectors and businesses.

Progress by business sectors: Reviewing progress and practice across specific business sectors. We will identify which sectors have made progress and which sectors have a culture of poorer performance. We will investigate and set out the reasons and drivers behind the different performance of different sectors and explore barriers and solutions.

The culture and impact of late payment: The review will examine business behaviours and increasing awareness of small businesses experience of late and long payments, including:

• the impact of late payment on business sustainability and growth
• the emotional and psychological impacts on small business owners and staff
• business payment culture and behaviours - contracting practices, liquidity, and cash-flow pressures in small and large businesses
• differences in business characteristics and the effect of these differences on cash flow considerations

The review will consider and make recommendations regarding the role of government and others in influencing and establishing a stronger culture of responsibility within large businesses regarding the sustainability of their smaller suppliers.

Existing government levers: The review will examine the effect of existing government policy levers and make recommendations on the future of these policies, including how they can work better together and where they can be improved. This includes:

• the role of the Office of the Small Business Commissioner, including its complaints and dispute resolution function
• the voluntary Prompt Payment Code - where businesses sign up to commit to paying suppliers promptly
• the Reporting on Payment Practices and Performance Regulations – a requirement on large businesses to report and publish data on their payment performance
• the role of public procurement – including raising awareness of changes being brought in through the new Public Procurement Act
• the provision for Statutory Interest on outstanding debts for in scope contracts (Late Payment of Commercial Debts Act 1998)

Finance: How major banks and innovative lenders might help small business manage cashflow effectively, and the barriers to small business accessing financing solutions; raising awareness of different appropriate products in the market and exploring whether more can be done. Consideration of the right time to use finance, relative to seeking other forms of advice and support.

Technology: How technology can help - considering the role and take up of tech-enabled accountancy platforms, and how this varies across different sectors.

Awareness: Improving awareness and take-up of the support and tools available and understand that different support and tools are required at different stages of business.

Two specific products will be launched as part of the overall review:

Consultation on the payment reporting regulations

A consultation document on the Reporting on Payment Practices and Performance Regulations 2017 and the Limited Liability Partnerships (Reporting on Payment Practices and Performance) Regulations 2017 (the Regulations). Following on from the statutory review of the Regulations, which reported in April 2022, this document will launch a 12-week consultation and set out specific proposals on renewal and improvement of these duties. The consultation will consider whether the Regulations should be extended beyond 6 April 2024 and whether there should be any other potential amendments to the Regulations.

Statutory review of the effectiveness of the Small Business Commissioner

A call for evidence document to inform the Statutory Review of the Small Business Commissioner, looking at particularly their effectiveness in improving payment practices in commercial transactions and the impact of the commissioner’s actions on awareness of small businesses of, or the use by small businesses of, alternative dispute resolution procedures. This statutory review is required by the Enterprise Act 2016.

The Small Business Commissioner is also scheduled to be reviewed as part of the Cabinet Office’s Public Body Reform Programme. We anticipate that the conclusions of this statutory review will also fulfil the requirements of this Public Body Reform process.

Revision to the Small Business Commissioner’s powers, following on from the consultation in 2020, will be considered following the conclusion of the wider payment and cash flow review.

Timescale and approach

We will undertake early engagement with stakeholders to refine themes and questions.

We will invite stakeholders to submit written evidence if they wish and will offer opportunities to discuss these matters in meetings and roundtables with Ministers, and / or the Small Business Commissioner Liz Barclay, and / or government officials.

As one method of engagement, roundtables may follow the structure of a series of individual sessions based around different business groups, for example, business size (micro, small, medium) or sector, considering the distinct issues that exist between these different groups.

Each session could include both business representative organisations and business owners themselves to provide a first-hand perspective.

The representative organisations invited can support and facilitate business owner attendance from within their membership and networks.

Groups, such as the SME Action Group of business leaders, may support as part of this programme of engagement.

As above, we will launch 2 specific products:

• consultation on future of the payment reporting regulations
• statutory review of the effectiveness of the Small Business Commissioner

We anticipate delivery of a conclusions document in 2023 which would:

• summarise our findings with respect to the areas set out at above, in response to the engagement undertaken, and next steps
• form the government response to the consultation on the reporting regulations
• set out the findings of the statutory review on the performance of the Small Business Commissioner

Governance

This review will be led by the Minister for Enterprise, Markets and Small Business, and report to the Secretary of State for Business, Energy and Industrial Strategy.