26 Sep 2011 The late payment myth
We hear all the time about big companies paying suppliers late, abusing their power to take advantage of the good will of smaller companies by delaying payment for as long as possible in order to enrich themselves at the expense of weaker, more vulnerable companies. Well, it’s not true. Deliberate late payment by large companies in all but a few exceptional cases doesn’t go on. Systematic management of cash flow by withholding payments is a myth. The reality is, surprisingly, much worse!
Many, I’d go even further, most large companies are poor payers. Terms are often unattractive to suppliers – 60, 90 even 120 day payment terms are becoming commonplace – but even with terms stacked in the buyers’ favour, it is a common occurrence for actual payment to be late. This can have an inordinately negative effect on small businesses who supply bad payers. For a supplier who has already had to part with cash to buy raw materials and pay staff or sub contractors, they need their cash replenished in order to supply the next customer.
In the counting houses of the the big buyers, it’s all about cash flow, DPO and DSO. The cash position is a key element of the share price and it can make a big difference to the numbers that are reported. To a supplier waiting for monies due, cash flow is a more mundane concept – it’s about being able to continue to trade.
So why do the big companies get away with it? Surely, even if they don’t have any human compassion for a struggling business, it’s not in their interests to see suppliers suffer. But the sad fact is late payment is not intentional. It happens because of incompetence.
The reasons for late payment are numerous. Invoices sent to the wrong address get lost. Even sent to the right address they can be mislaid. Inefficient accounts payable processes, poor purchasing practice and poor practice by the supplier themselves, all can add up to a complex and confused paper trail that is difficult to untangle.
But whatever the root causes, when a company consistently misses payment deadlines, it needs to take responsibility. Invariably, poor payment performance reflects an underinvestment in the management purchase to pay processes. It is nothing like as sophisticated as a deliberate management of cash flow – that would at least have the dubious merit of being clever – no, it’s worse than that. It’s incompetence and the CFO should be held accountable.