It's nothing new that large corporates delay payments to their suppliers in order to increase the amount of working capital they have on hand to reinvest in operations. It's a tactic that has been widely criticised, not least by those on the receiving end of this cash flow game: the smaller suppliers that are left waiting upwards of 90 days for payment. The European Commission adopted the Late Payment Directive in 2011 and has been working since then to raise awareness of the damage done to SMEs. In April this year it proposed measures to ban unfair trading practices in the food supply chain. The UK government also announced it will tackle what it called “the continuing scourge of late payments” for SMEs.
Scourge of late payments
Research by Previse suggests that SMEs in the UK have had to take out £31.5 billion in funding to maintain their cash flow due to slow payments, while a study of UK companies by the Chartered Institute of Credit Management (CICM) found that 27 per cent of all invoices are paid late, leaving SMEs struggling for cash. The problem is an enduring one – and one that was brought into focus earlier this year with the collapse of private UK contracting firm Carillion, which owed hundreds of millions of pounds to around 30,000 smaller suppliers.
That's why it's disappointing to see the Wall Street Journal's article Delaying Payments to Suppliers Helps Companies Unlock Cash. The article details how the US tool-making company Stanley Black & Decker has managed to unlock nearly $500 million from the company’s working capital since 2005 by persuading vendors to give it a little more time to pay its bills. The company's payment terms are now around two months. And clothes manufacturer Hanesbrands also achieved working capital 'optimisations' – it saw an increase of 8.5 per cent of cash from operations after increasing payment terms by more than 10 days over the past six years. These figures are impressive, but what about the suppliers?
Corporates holding back payments
Journalists Tatyana Shumsky and Nina Trentmann write: “Financial chiefs at US companies are holding back payments to their suppliers for longer than at any point in the past decade, a push that is helping them keep more cash on hand that otherwise would be tied up in their businesses.” The article continues: “as borrowing costs rise, companies are doing more to access the funds trapped in operations”. In other words, large corporations are having to pay higher rates for credit from banks and so are extending supplier payment terms to free up cash that way instead. In effect, the smaller vendors, which can least afford it, are in effect bearing the brunt of the higher cost of lending.
That hardly sounds like good business, considering the cost of borrowing for a large corporate would typically be higher than the cost for a small vendor. While Stanley Black & Decker's CFO, Donald Allan, explains that his company's arrangement with suppliers was a 'partnership', because the large tool company helped its suppliers to “be more efficient and effective”, the statistics suggest that late payments nonetheless are damaging to SMEs. The article also goes on to describe freeing up cash through streamlined inventory management – perhaps a better way to improve working capital metrics.
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