Payment terms on the political agenda as big firms screw their small suppliers

The Telegraph had a big splash yesterday about the UK Government “going to war” over late payments which “have reached record highs of more than £36.5bn”, and are particularly damaging to small firms who struggle to get funding if their customers basically aren’t paying them for months and months.

Michael Fallon, the Business and Enterprise Minister, told The Sunday Telegraph that he was “going to war” on the issue of late payments after hearing complaints from small and medium-sized businesses.

Many have to wait up to 180 days to be paid for services they provide to larger companies and the minister revealed that he had been told of one well-known company that had a payment process approaching 200 days. …

Only 54 firms have signed up to the Prompt Payment Code, and the Minister is talking about “naming and shaming” firms who don’t do so soon. Will this be enough? I have my doubts. We may need either stronger legislation, or some sort of customer movement, like the one that has made Starbucks reconsider their position on Corporation tax. But is the average O2 customer, for instance, going to change phone providers because of this? I doubt it.

I’m not a great advocate of more legislation in most cases, but perhaps we are getting close to the “something must be done” point. There are some examples of recent of matters getting worse rather than better - Sainsbury’s increased payment terms for certain suppliers from 30 to 75 days, as we featured here. And  O2 have apparently extended terms for some suppliers to 180 days! That may be at the behest of Telefonica, their Spanish parent – payment terms in Spain are apparently often of that duration. That’s worked well for the Spanish economy, hasn’t it?

Joking aside, 180 days strikes me as just ridiculous, and, I’d argue, not good for business in the long term.  Indeed, I’d love to ask the O2 Procurement Director what he or she thinks this will do to:

a. their potential supply base, because most small suppliers certainly can’t work on that basis. So they may be restricted to dealing purely with large suppliers.

b. their supplier relationships, for obvious reasons.

c. the actual value they will obtain in the medium term, as suppliers increase their prices to compensate for not getting paid.

Now, as we’ve also said before, there are exciting new options around supply chain finance and dynamic discounting, which have the potential to turn this into for a win:win opportunity for buyer and seller. But merely extending terms to 180 days seems unreasonable, irresponsible and probably self-defeating,

 

 

Voices (3)

  1. bitter and twisted:

    I’ve renegotiated my payment terms with sainsburys, from cash on delivery to by invoice net 180 days. That’s what I told the store detective anyway.

    Seems the problem is meddling Finance. They should advise procurement the value of extended credit then FtFO.

    And an AP depr that can’t cope with varied payment terms is incompetent.

  2. RJ:

    Working for the UK arm of a French company several years ago, our suppliers bristled when we were asked to move payment terms from 60 to 90 days, while the French suppliers were celebrating because they would actually be paid more quickly than the average 108 days in which they received their money!

    Whilst 180 days is indeed ridiculous, for most suppliers the issue is not what the contractual payment terms state, it’s whether the buying organisation complies with them. Few, if any, SMEs can take the risk of annoying their large customers by imposing interest payments for late payment.

    And stating the obvious to readers here, too, the other key factor for procurement professionals is that this removes a potentially valuable negotiation variable from the equation. The short-termist view of Finance teams that look to improve cashflow by delaying payments can often miss the value that can be gained from early payment discounts.

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