Join our community of smart investors

Cash-strapped FTSE 100 companies delay payments to suppliers during Covid crisis

SME business leaders warn blue-chips are passing the burden of the economic crisis onto smaller companies
March 24, 2021 and Alex Newman
  • Investors’ Chronicle analysis reveals how payment practices have slipped at companies in some of the sectors hit hardest by the pandemic
  • But withholding payments to suppliers comes with financial and increasing reputational risks

A handful of FTSE 100 companies have significantly delayed payments to their suppliers during the coronavirus pandemic, analysis of public documents reveals, amid warnings that large companies are passing the burden of the economic crisis onto smaller businesses.

Filings submitted to the government show that several blue-chip companies and their subsidiaries, including those of British Airways-owner International Airlines Group (IAG), have been taking far longer on average to pay invoices than before the pandemic.

A review of these documents by the Investors’ Chronicle also found that average payment times made by legal subsidiaries of leading manufacturers Rolls-Royce (RR) and Meggitt (MGGT) have notably increased during the past year.

Before these figures were published, SME business leaders were already warning that payment standards had slipped during the pandemic. According to a survey in July by the Federation of Small Businesses, some 62 per cent of companies suffered late or frozen payments in the wake of the Covid-19 outbreak. At the start of this year, an estimated £23bn-worth of late invoices remained unpaid across the country.

Holding back money owed to suppliers is not a new tactic by big companies, for whom it is often convenient to keep cash free for other purposes. But renewed government awareness of this issue during the pandemic has increased the regulatory and reputational risk for those who delay payments. In January, the business department announced plans to crack down on large companies, requiring the nearly 3,000 companies that have signed up to its prompt-payment code to pay 95 per cent of their invoices from small suppliers within 30 days. 

Experts warn that those deliberately withholding payments may also be storing up financial trouble for later.

Sue Chapple, chief executive of the Chartered Institute of Credit Management, says companies that avoid paying invoices are inaccurately reporting their true level of liquidity to investors. They are claiming they have money in the bank that they have not really got, she adds, because it will ultimately have to be paid to other businesses.

Delaying payment to one supplier “can be preventing a whole series of suppliers from getting paid”, says Chapple. “At some point in that supply chain it can be sufficient for those businesses to fail.”

 

 

According to the FSB, about 50,000 firms a year close annually due to late payments. Mike Cherry, head of the small business group, says the pandemic has only deepened a “late payment crisis” that was stifling the UK economy long before 2020. 

In recent years, the government and regulators have introduced a range of measures to clamp down on the most exploitative companies. Since 2017, businesses with an annual turnover of £36m, £18m on their balance sheet and at least 250 employees have been required to submit data on their payment practices to the government’s website every six months. 

Before that, the business department asked firms to commit to its prompt-payment code, which previously required members to pay 95 per cent of their invoices from small suppliers within 60 days. Signing up to the code remains voluntary, and there is no financial or legal penalty for not adhering to it, but many that do not meet its standard have been publicly named and shamed.

Targeted regulations in the supermarket sector have actually significantly improved payment practices over the past year. Despite widespread concerns that the situation would deteriorate across other sectors, the past year has also not been the crisis that was expected at the beginning of the pandemic, says Chapple. 

In 2020, large companies paid an average of 29 per cent of invoices late, according to the data submitted to the government, less than one percentage point more than during the previous year. Overall payment standards have remained largely unaffected, Chapple explains, as businesses relied instead on unprecedented government support to bolster their balance sheets.

 

Travel companies and manufacturers stretched

But concerns remain about how payment standards will be impacted once taxpayer support is eventually lifted. Even as the government extended billions in grants and loans to UK businesses, companies in some of the worst-hit sectors have been taking longer than normal to pay their suppliers.

In the six months to December, the average time that IAG Cargo, the luggage-handling division of International Airlines Group, took to pay invoices almost doubled year on year, to 51 days. Over the same period, British Airways’ average payment period jumped 53 per cent, to 46 days. The IAG-owned airline also reported that during the final half of 2020, 17 per cent of invoices were not paid within 60 days, despite it being a signatory to the prompt-payment code.

This happened as international travel was severely reduced during the pandemic, significantly squeezing income for airline companies. IAG was spending far more money than it generated; it reported negative cash flow of €3bn (£2.6bn) in 2020, compared with positive cash flow of €1.5bn in the previous year.

A spokesperson for IAG Cargo and British Airways said the aviation industry was among those hardest hit by the pandemic, adding that “we remain committed to paying our suppliers in good time and thank them for their understanding during this unprecedented period”.

Several manufacturing companies, many of which are facing a substantial fall in demand for their goods, are also among those whose payment standards appear to have slipped over the past year. Of all companies registered as public limited companies on Companies House, the head office of FTSE 250 engineering group Meggitt has reported the longest average payment period since 2020. In the six months to December, it took 132 days on average to pay suppliers, compared with 72 days during the first half.

A spokesperson for the company said that figures for Meggitt's head office were impacted by a systems implementation that was delayed due to Covid-19, and account for only 5 per cent of its UK invoices. Elsewhere, the average time that Meggitt’s UK manufacturing division took to pay invoices jumped 19 per cent year on year, to 56 days. The average payment period for its aerospace subsidiary increased from 66 to 71 days.

Day-to-day payments management at FTSE 100 manufacturer Rolls-Royce was also tested in 2020. The engineer’s plc took an average of 78 days to pay suppliers in the second half of the year, eight more than the same period in 2019, while the proportion of invoices not paid within agreed terms crept up from 7 to 10 per cent.

This strain was reflected in full-year results for the group, which showed a £4.2bn free cash outflow. In the first half of the year, Rolls took a £1.1bn one-off hit to working capital from the cessation of invoice factoring – a practice that previously meant the company could book cash receipts on delivery of its engines.

A spokesperson for Rolls-Royce said “We are committed to ensuring we pay our suppliers promptly and are working on reducing the number of payments that are outside of our supplier agreements. We have worked and continue to work with certain of our suppliers who have encountered challenges during Covid, to help support them where needed."

Subsidiaries owned by manufacturing turnaround group Melrose Industries (MRO) also showed signs of stretched payment arrangements in 2020. The head office of GKN Automotive, the driveline manufacturer Melrose acquired as part of its hostile takeover of GKN in 2018, paid just 14 per cent of invoices within agreed terms in the six months to June, compared with 77 per cent in the first half of 2019.

This improved to 23 per cent in the second half of 2020. While unconnected, this increase coincided with GKN Automotive offering suppliers the use of a group-level supply chain financing programme, in which Melrose’s banks pay suppliers on demand at a slight discount and at no cost to the group. Over the course of 2020, GKN's aerospace services arm also saw an increase in the proportion of invoices not paid within agreed terms, although average days to payment improved. GKN Driveline Birmingham, which manufactures car parts, also improved its payment terms.

A spokesperson for GKN Automotive said the company seeks "to agree terms with all our suppliers and pay invoices on time", and that "it has a good track record of this, particularly over the last 12 months". They added that invoices for GKN Automotive Ltd relate to "less than 5 per cent of our global business and is not representative of the progress we are making".

 

Super-markets?

By contrast, a more flexible approach to supplier relationships after several years of regulatory oversight combined to broadly improve grocers’ payment terms in 2020.

A decade ago, supermarkets’ use of negative working capital – whereby payment is withheld until supplied goods are sold – was a source of considerable political concern. This prompted the government to set up the Groceries Code Adjudicator to oversee grocers’ fair treatment of suppliers. In 2016, the watchdog accused the market leader, Tesco (TSCO), of having “knowingly delayed paying money to suppliers in order to improve its own financial position".

Such oversight appears to have worked. Shortly before the GCA’s original head, Christine Tacon, stepped down from the role last year, the body said the largest UK supermarkets “are now exemplars among businesses for paying on time”.

This is broadly reflected in payment figures. In the first six months of the pandemic, Tesco’s food sourcing arm took an average of 11 days to pay its suppliers, and paid 100 per cent of invoices within 30 days. This followed a pledge at the start of the pandemic to pay almost 2,000 of its smallest suppliers immediately, instead of its ordinary policy of 14 days. In the same period in 2019, suppliers to Tesco’s food sourcing business were paid within 30 days seven times out of 10, with an average wait time of 29 days.

Like Tesco, Wm Morrison (MRW) shifted to immediate payment for its small suppliers when the pandemic hit. The financial cost was a £45m working capital strain in its financial year to January, which hit free cash flow and helped to push up debt. This commitment was also reflected in its disclosures, which showed a drop in the average time taken to pay all invoices to 41 days in the second half of FY2021, from 47 in the previous year.