Rent and Service Charges

Payables and Working Capital

Payables within any organisation is a vital finance function. It involves overseeing the seamless processing of invoices, securing necessary approvals across an organisation and ensuring timely disbursements of payments to the appropriate vendors.

The first time I came across payables within housing was in 2011. I was an Income Officer and my role had transferred from Norwich to London. For some reason the relevant person in the Norwich office had overlooked a High Court judgment against the organisation which was enforceable due to failings to a resident customer.

As a result court bailiffs turned up at one of the London offices to seize goods. No one wanted to deal with it so I tackled this and worked with the finance team to ensure prompt payment, which was made by company credit card.

No goods that the bailiff noted were taken such as computers and furniture. The bailiff and I seemed to be on the same wavelength. I worked out what had gone wrong from what the bailiff told me.

There was some banter with others when I returned to the other office. I recall a very wise man say to me four things:

-The person in Norwich that had overlooked this should have been sacked.

-That he himself wasn't a call centre.

-The paperwork I was given by the bailiff looked like 'bailiff handwriting!!'

-I had 3x more work during potential transition when compared to a team of 4 that was in Norwich.

There were other small things about payables I learnt even though I wasn't in the finance team. This included avoiding the need for a purchase order for possession and small claims applications.

Instead I was able to use a chequebook that allowed me to write cheques under HMCTS. This enabled these to be sent directly with the applications I made to the relevant county court. This speeded up the process tremendously especially when these were paperbased and helped massively with income collection.

A few years later, I got into payables alot more when I worked within the finance team for a charity. I was entrusted to go into the online banking portal and put through payments. I had been given my own username and password and it was to cover for when the Financial Controller wasn't about or was on leave. The Financial Controller himself was a wizz and guru with accounting and I learnt a lot from him aswell as from the Management Accountant.

I liked how there was planning and arrangements in place due to any issues with staffing for payables.

In more recent years I've gained a thorough grasp of financial systems and ledgers. I really like seeing how at month end what transactions had gone through whilst seeing what was outstanding and needed to be accrued for.

And especially within service charges whereby it is so important to ensure invoices, accounts and receipts show what payments have been made to then recharge to resident customers. One finance system I do like is SUN with its Q&A add on as this shows a good summary of cost codes, the amounts paid and timings relating to transactions relevant to specific periods.

Having good financial management within payables helps avoid spending silly hours having to identity where invoices exist so as to demonstrate service charges are justified and avoid refunds when services were reasonably provided. This also requires data to have been inputted accurately as in one webinar I watched, someone said "garbage in = garbage out."

I've seen this on a couple of occasions when charges data had to be submitted to the Regulator of Social Housing via the Statistical Data Return. I found to date one external consultant to be blunt hopeless at being able to remedy the problems. In fact they did such a poor job that this was one of the contributers towards the housing association's governance being downgraded.

The same logic of good financial management should also be applicable with sinking funds especially in having a bank account where the funds would need to be allocated to.

More recently in my charity volunteering, I have enjoyed analysing and calculating ratios which includes the accounts payable turnover ratio especially when charity accounts vary to say company accounts.

This payables metric is calculated by taking the total net credit purchases from all suppliers during the period and then dividing this to the average accounts payable for the period.

Usually a higher payables turnover ratio indicates that a company pays its bills faster than those with a lower ratio. This can be a good sign for organisations that rely on lines of credit, as suppliers and lenders use this metric to gauge the risk they are taking.

Where I've seen a lower payables ratio, then I've done some further digging into seeing if the organisation maybe paying at certain times so that it could be utilising keeping the cash in the bank. This is so that say more credit interest could be gained. Or otherwise it's an indicator of bad administration and organising of finances aswell as if there are large payments, then authorisation channels for these have been poor.

Working capital with payables can also be pressurised by very poor receivables management and credit control. I always investigate further whether credit control is good within an organisation and if not identify why urgent changes are not being made especially when there are pressures from third parties such as limits in accessing credit facilities or say bond/loan stipulations.

On 15th August 2024, the Court of Appeal handed out judgment for the hearing that took place between a contractor and a housing association. This was an appeal by the contractor as the relevant lower court had found in favour of the housing association. Below is a summary of what happened between the two parties extracted from the judgment.

The judgment, states that on 25th November 2022, the employer’s agent issued Payment Notice 27, pursuant to which the housing association was required to pay £264,242.55 on or before 15 December 2022. The housing association failed to pay the sum due by that final date.

The following day, 16 December 2022, the contractor served a notice under the relevant clause [“the December Notice”]. The terms of the December Notice included:

“You have not paid us the amount due to us under Payment Notice No. 27, i.e. £264,242.55, by the final date for it's payment, i.e. 15 December 2022. We therefore give you this Notice of Specified Default under the relevant clause of the Contract.”

On 29 December 2022 the housing association paid the sum of £264,242.55 in full. It is common ground that, because payment was made on that date, the specified default did not continue for 28 days from the receipt by the housing association of the December Notice.

Accordingly, it was not and never became open to the contractor to serve a further notice pursuant to the relevant clause in respect of that late payment.

On 28 April 2023, the employer’s agent issued Payment Notice 32, pursuant to which the housing association was required to pay £365,812.22 on or before 17 May 2023. The housing association failed to pay the sum due by that final date. The following day, 18 May 2023, the contractor issued a further notice, this time under the relevant clause [“the Notice of Termination”].

The Notice of Termination referred back to the December Notice and relied upon the housing association's non-payment of the sums due on 17 May 2023 as a repetition of the specified default that was the subject matter of the December Notice. Accordingly, the contractor gave notice that the housing association had repeated a specified default and stated that it terminated its employment under the Contract pursuant to the relevant clause.

Without prejudice to its asserted contractual termination of the Contract, the contractor said that 19 of the 32 payments that the housing association had been required to pay had been made late and stated that it accepted what it characterised as the housing association's repudiatory breaches of contract so as to rescind the contract and terminate it in accordance with its Common Law rights.

On 23 May 2023, the housing association paid the sum of £365,812.22 in full. The next day, 24 May 2023, the housing association disputed the lawfulness of the Notice of Termination and asserted that the contractor had repudiated the Contract. A week later, on 31 May 2023, the housing association wrote again to the contractor, accepting what it characterised as the contractors repudiatory breach.

As you may be thinking from the extracts of the judgment, all that needed to be done was to pay the contractor on time.

This is the simple context of the matter. The contractor had a yellow card and red card. There is nothing academic about this.

The contractor succeeded with its appeal. At the time of the lower court judgment I found it, again to be blunt, bizarre in how some in the housing industry were celebrating that winning in paying late to the contractor along with the contractor being determined as being in breach, was like a victory.

Some publications even accused the contractor of being 'trigger happy.'

There are contractors who are struggling with liquidity which results in new housing developments not being completed. The developments would be left partially complete with further costs incurred such as for security and safety purposes which is a waste.

As Lord Denning once said "cash flow is the life blood of the construction industry."

The contractor said in his own words "when the persistent late payment was bought to the attention of the housing association and their team (along with enacting other remedies) it simply fell on 'death ears', this was particularly frustrating when in the time of industry decline, when ensuring that your supply chain was paid on time to ensure it was fed and watered with utmost importance to us, the housing association took a different view of the importance of this time and time again" (source www.constructionindex.co.uk).

In reviewing the housing association's 23-28 corporate plan, it says it will "draft a merger plan as a risk mitigation for a worsening financial outlook."

I was also thinking about whether other industries would have celebrated in the same way like this including legal firms themselves.

No doubt a legal firm would walk away from their client if they did not receive payment. For instance within conveyancing, if the potential buyer of the property fails to pay usually a deposit from the start, then the property sale legal work does not even begin.

This case shows as similar to the court bailiff and service charge examples above but with much serious consequences, how important payables within an organisation is.

There must have also been alot of money spent towards the costs of litigation especially at Court of Appeal stage.

I do like how the Institute of Financial Accountants has webinars in association with Yooz company that specialises in E Invoicing and P2P (purchase to pay) Automation. I enjoy watching these so that it tops up my CPD hours. I'm required to complete 40 hours of CPD each year.

Timely payments can further reduce the risk of an external auditor thinking there is possible fraud aswell as issues relating to 'going concern.' In mid August 2024, Pricewaterhouse Coopers (PwC) was duty bound to report suspected fraud of an organisation to the relevant watchdog but did not do so.

As a result, PwC was fined £15m by the Financial Conduct Authority (FCA). This has never happened before. It may prompt external auditors going forward to have more professional skepticism and some may even become more like being a 'frauditor' than an auditor. This is especially when the failure to prevent fraud legislation will be introduced.

The FCA fine is on top of the separate sanction issued by the Financial Reporting Council (FRC) for the same audit by PwC. The FRC issued a financial sanction of £7m discounted by 30% for admissions and early disposal to £4.9m.

The Court of Appeal hearing that took place on 30th July 2024 for the contractor and housing association, can be viewed on YouTube. The written judgement first page is provided below, the two parties names have been redacted. The full judgment is available via the Court of Appeal civil division archives.

In watching the hearing, the honourable Judges towards the end of the proceedings had also even mentioned Grenfell.

Finally with all these serious and grave matters along with your kind indulgence, I feel the need for a bit of light hearted fun.

Here's me playing the piano at Abbey Wood rail station.

The song is called 'Believe Me, If All Those Endearing Young Charms.'

This was on a late Friday evening just after mid Nov 2022.

That's all folks!!!