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News this week that Tesco is looking to double its payment terms with suppliers to 60 days should certain raise some eyebrows within (and beyond) cash-strapped food service and retail sectors. Yet, hopefully, it will not cultivate a cult of imitators.
While cash is certainly king in today’s economy, this is not the time to withhold payment from your suppliers. If your cash strategy is to delay or extend payment cycles for suppliers, you’re only putting your company at risk for supply disruptions and operational challenges. (And, as the automotive industry has learned, suppliers are like elephants: they never forget. If you delay supplier payments, don’t expect top-notch service.)
In fact, now is the time to create greater efficiency and transparency in your invoice reconciliation and payment processes so you can make informed decisions as to whether to pay suppliers on time or even (gasp!) early to take advantage of early pay discounts and to keep your suppliers in business. Many cash-hungry suppliers will even likely reward you with additional rebates for early payment.
Consider one technology company who secured 60 day payment terms from customers but paid its suppliers net 75 days. When two suppliers went belly up because they didn’t have the cash to fund operations, the company was sent scrambling to find alternative supply.
One of the quickest ways to get cash under control is to automate the invoicing and payment process. This gives you clear visibility into your commitment and payment streams, ensures invoice and payment accuracy and increases rebate and discount capture. Most importantly, this new visibility allows you to make informed payment decisions based on cash needs, early-pay discounts and rebates, and overall supplier viability.
Companies that have automated their invoicing and payment processes report that suppliers typically grant concessions of 0.5% up to 4% for faster payment. And that type of return can mean the difference between achieving your company’s cost savings and profitability goals or becoming another victim of today’s uncertain global economy.
To learn more about how to turn improved cash management into a competitive advantage, attend the upcoming PayStream Advisors’ webinar, Unleashing Cash from AP: Three Simple Finance Tools for the Downturn on November 13th. (Register here) Can’t wait that long? Learn other quick-impact Spend Management and Cash Management techniques for countering the current economic crisis here.
5 responses so far ↓
1 Dan Kowal // Oct 29, 2008 at 1:40 pm
Very timely Tim, GM and Ford have both recently extended payment terms to 60 days from second day, second month (about 34 days).
2 Tim Minahan // Oct 30, 2008 at 12:13 pm
Thanks, Dan. At the risk of sounding too harsh, extending supplier payment terms is the lazy way out. The reason companies revert to such tactics is because their invoice receipt, reconciliation, and payment process is too fragmented and, most likely, manual. They simply lack the visibility to even know if they’ve received an invoice, let alone whether it’s accurate or they should pay this. Extending payments not only improves the company’s own cash position (at least initially) but it also allows them to get some perceived ‘productivity’ improvements by allowing more time for the reconciliation process.
Yet, as we discussed, this approach is short sighted and will most certainly have egregious side effects, including negatively impacting the company’s cash position in the long run due to supplier backlash in the form of unwillingness to step up service, reduce non-value-added costs, or grant price concessions or rebates.
The wise thing to do is to automate the process to create process efficiencies (i.e., make it less costly to reconcile and pay) and drive greater visibility into the invoice and pay streams so you can ensure invoice accuracy and rebate capture make more informed decisions on when to pay suppliers based on how it will impact cash and rebates.
3 Brian Powilatis // Oct 30, 2008 at 10:24 pm
With the credit crisis and impending economic downturn threatening the solvency of many smaller (and some larger) suppliers, a recent roundtable of Board of Audit Committee Directors reveals that, after only company liquidity, supply chain solvency risk is the top concern of Boards of Directors.
The Procurement Strategy Council is advising members to use a Supplier Solvency Strategy Matrix© to assess your supply base for criticality and solvency, to take a segmented approach to supplier management in a tight credit market.
One dimension is supplier importance. Are they expendable or are they critical? The other dimension is relative supplier solvency. Are they flush with cash or suffering from constrained credit?
For expendable suppliers. If they are financially distressed, find an alternate and exit. If they are flush with cash, you have the opportunity to extend payment terms and conserve your company’s cash to deploy elsewhere.
For critical suppliers: Those that are financially distressed—you’ll want to shorten your payment terms, help arrange financing, or maybe even more drastic measures. But you’ll also want to explore alternative supplier to decrease your dependence. For those that are critical and flush, these are your preferred partners. But if they are in such a strong position, you won’t be the only ones interested in them. You’ll want to cultivate your relationship and become a “customer of choice.”
Brian Powilatis is the Managing Director of the Procurement Strategy Council, a best practices research membership of the Corporate Executive Board and can be reached at Brian.Powilatis@executiveboard.com
4 Supply Excellence — Increasing Liquidity Without Soaking Suppliers // Nov 6, 2008 at 5:45 am
[...] as I have noted previously, and as Tim Minihan wrote so passionately about in his blog post last week, paying suppliers late or extending terms right now is adding enormous [...]
5 Supply Excellence — Cost Cutting: What You Can Learn from Small Business // Feb 12, 2009 at 3:00 am
[...] are using faster and more reliable payments to reap additional savings and goodwill with suppliers. As reported in a previous post, companies that have automated or improved their invoicing and payment report additional discounts [...]
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