14 Jan 2010 Delaying Payment – A Blunt P2P (Purchase to Pay) Weapon That Misses Its Target
Times are tough. They’re tough for everyone – big business and small enterprise alike. And we all need to recognize that we all have a contribution to make to ensure we all weather the current economic storm with the minimum damage. So when we hear of large retailers seeking to extend payment terms to their smaller suppliers, my concern for the suppliers is tempered with the knowledge that no-one is immune and we should consider carefully how loudly we bleat when, to be frank – shit happens. So it’s not an emotional reaction that leads me to be very concerned on behalf of smaller suppliers when they are asked to wait 65 days for payment.
When interest rates are in the normal range that we’ve been accustomed to over the last few decades, fluctuation between a few percent and a little over 10%, payment terms is an important P2P lever. Paying late can give the buyer a significant cash advantage. Interest earned on cash (or avoided on the overdraft) can be the equivalent to a few percentage points off the price of the goods bought. To the supplier, it’s a double pain. There’s a cost of interest on extra borrowing but there’s also a cash flow impact that effects their ability to pay for raw materials and manage demand effectively. Factoring is an effective tool for the supplier to assist cash flow of course but it comes at a price. So getting payment terms right is as important as getting the price point right.
But the world has changed. Interest rates are practically zero. The cash benefit to a buyer of extending payment terms is negligible. To the buyer, practically zero interest rates yes – but only if the credit is available. For the supplier, credit being unavailable is worse than credit being expensive. For many small suppliers, an extension on payment terms will be nothing less than disaster and it will be counter productive for the buyer with no significant commercial benefit and a potentially disrupted supply chain.
Delaying payment can be a blunt and brutal P2P (Purchase to Pay) weapon at the best of times and there are sound reasons why some organizations refuse to use it preferring a policy of prompt payment always. At best, delayed payment in 2010 is misguided. At worst, it is a cynical approach aimed at forcing price reduction.