Payment Term Benchmarking can Provide Hard Data to Negotiate

Trade Financing Matters welcomes this guest article from Brian Shanahan, founder of Informita and and co-founder of The Working Capital Channel.

Last week we examined some of the caveats benchmarking payment terms. Most of the resources out there have some holes in what they offer. It’s not a perfect science by any means but one that can be a powerful tool come time for negotiation with your buyers or suppliers.

Take for example a global based pharmaceutical company with revenues of over $35 billion that has many distributors established across the Middle East and Africa. In several of these countries arrangements had been made to use local distribution companies rather than establish their own local models. In many cases the distributors had demanded terms in excess of 90 days in order to do business. Having a database such as Termscheck to check whether the terms being demanded were in line with other distributors in the same markets and whether these terms were the normal terms being offered by these distributors to other companies can be very powerful.

In this particular case, the findings showed one Tunisian distributor was demanding 180 days terms while the database suggested that 60-90 day terms were more normal in that market. It even showed that that specific distributor had offered terms as low as 45 days to another firm. The analysis also showed major disparities in what terms were offered to different companies in countries such as UAE, Bahrain and Saudi Arabia. This information was then used by the local affiliates to support their negotiations with these companies which results in either reduced payment terms or in reduced costs to the client.

In another example, a UK private company that provides capital equipment rentals to the construction sector needed to rebalance its balance sheet by reducing receivables and increasing payables. Key to the business was that these changes were not one-offs and had to be self-sustaining. A key question was even though such rebalancing was necessary, what was the real potential for change?

Running both their supplier and customer databases against a payment database can provide some interesting results. In this case, customer matches covered 19% of total revenues and suggested that there were a number of customer terms that were longer than the average offered in the market for those specific customers. On the supplier side the matches made up 36% of supplier spend. That suggested a cash flow opportunity of 5% of spend by extending payment terms to the average of those identified in the TermsCheck database.  So for this $200 million company that equated to a $10 million cash flow opportunity if all were implemented.

In sum, payment benchmarking analysis can provide a business case for a successful working capital program.

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