Payment terms of 30, 45 and 60 days are not unknown. But the time it takes big companies to pay their little suppliers can be as much as 120 days, and it is getting worse with the average now 58.5 days according to a report by D&B. This is not only tantamount to corporate bullying, but also BAD FOR BUSINESS.
Paying bills on time, whether you are a large corporate, an SME or a consumer has a dramatic effect on the money supply. And this has a positive impact on UK businesses. It is way more effective that the current QE games that politicians are playing or trying to force banks to lend to SMEs.
If a large corporate pays its invoice to a smaller supplier after 15 days instead of 45 several things happen:
– the supplier can pay its suppliers for products purchased, often on a credit card with 30 days terms, and its employees, who are paid monthly, WITHOUT driving up its working capital requirements
– this means that there is no need to burn up time with the banks trying to agree a working capital loan, and eliminates the set up fees, interest payments and lawyers fees
– it means that supplies can grow more easily and therefore employ more people and pay more taxes
– time is not spent by supplier’s admin staff chasing the large corporates and listening to their ‘standard Accounts Payable lies‘ – “it will be in the next payment run”, “you just missed the cutoff for this month”, “the person who has to approve it is not in this week”., “we can’t find it so can you resend it” and so on.
– most small business, which have great products, dedicated staff and huge potential are killed by cash flow problems.
So why do we as companies or even as consumers fail to pay our bills on time?
There are number of reasons
There is the view that we will somehow benefit from hanging onto the money. But this is no longer true with interest rates hovering around 0%.
Companies think hanging onto the money will make their balance sheet look good, but this is not true because the unpaid invoice appears on the balance sheet as a liability.
Many suppliers do not make it easy to be paid. Their invoices are inaccurate so matching invoice to Purchase Order and goods receipt note is difficult. But also then need to make it easy to pay bills electronically.
And finally, many large corporates are just plain inefficient. Their Procure2Pay processes are shocking often supported by multiple disconnected IT systems. Staggeringly, in the US many large corporates are still paying invoices by cheque (check). When working in our San Francisco office I would often open up the morning post and find checks for $50,000, $100,000, $150,000 or more.
So what can be done about this?
- CFO’s of companies at every level need to realise the huge damage that their late payment approach is doing to the entire supply chain. If one of their key suppliers goes under because of cash flow problems that stem from late payments, they they are hurting themselves.
- The endemic ‘pay late’ culture needs to be broken and this has to be lead from the top. And it is the leaders of the countries largest companies who need to initiate it. BUT THEY ARE NOT. Payment terms of 60 days in contracts are common place. And you can guarantee that they will string it out payment way longer than that.
- The Government, rather than beating up banks to lend more, should instead focus on big corporates and their own Government finance departments to encourage them to pay more quickly. BTW the Late Payment Directive has no teeth and is largely ignored
- Suppliers need to get more professional and diligent about their invoicing
- Companies need to review, simplify and drive out non value added activities from their Procure2 Pay processes.
If they need help, then I know a company, TIBCO, who can help and has pre-built P2P processes already documented in its process management application, Nimbus Control.
But the payment terms are ‘cash up front’.