Some things get better with age – invoices don’t

Posted by Pete Loughlin in Financial Supply Chain Management, Purchase to Pay, Supply Chain Finance 04 Feb 2015

WinePosterSmallA number of years ago I visited a Champagne House in Reims, France. I asked our tour guide for advice on buying a bottle of Champagne that I could keep aside for a special event in 25 years time. “Do you have a cave?” he asked.

As it turns out, I don’t own a cave. He explained that to store Champagne successfully for such a long length of time would require optimum conditions – the constant cool temperature of the chalk caves in Reims would be ideal. But even then, 25 years is a little long for Champagne. I, like many people, had assumed that Champagne – especially a quality Vintage Champagne – would improve with age almost indefinitely. It does not. The time it takes for a wine to reach it’s peak varies widely. Some wines are ready to drink the moment they are bottled and indeed begin to deteriorate immediately. And so it is for invoices.

Just as the casual wine enthusiast may not be expert enough to know the optimum time to lay down a particular bottle of wine, so many finance professionals don’t know how to discriminate between supplier invoices. It is standard practice in many organisations to use supplier invoices as a tool to manage cash flow. The later suppliers are paid the better. And it is true. Extending terms to suppliers (the politically correct way of saying “paying late’) improves cash flow. By holding onto to your money for longer you can reduce the cost of borrowing. However, just as not all wines age well, not all invoices should be paid late. Indeed the costs of not making a distinction between those supplier invoices that should be paid promptly and those that need not could exceed the cash flow benefits of managing a blanket policy of extending terms to all suppliers.

Discerning finance people know that not all invoices should be paid late. Of course paying late means you can hold on to your money for longer. Of course it allows you to improve your cash position. Of course your DPO will improve. But not all invoices are the same. Pay the wrong supplier late and you could spoil an important strategic relationship. You might improve your cash flow but you will almost certainly be paying more than you need to for essential goods and services. Ignore the opportunity to pay early in return for a discount and frankly, you’re an amateur.

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Pete Loughlin can be found on twitter @peteloughlin

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