Should you pay suppliers late to keep your shareholders happy? It seems many 'top performing' companies are putting shareholders before their supply chain. But that is a terrible mistake.
Yesterday on CTMfile we covered the damage that can be done to smaller companies in the supply chain when payment terms are stretched beyond the acceptable limit, whether that is the agreed 30, 60 or 90 days. The report by Ultimate Finance and BDRC Continental highlighted that it's not just a problem for smaller companies – their research suggests that four-fifths of small- and medium-sized enterprises (SMEs) have a problem with late-paying customers and that the shortfall can amount to as much as £25,000-£30,000.
Another study from 2015 by Bacs, the UK direct debit company, found that SMEs in the UK are spending up to £11 billion a year on chasing late payments from suppliers.
So companies need to consider the actual amount of the late payment, which is in effect missing from their cash flows until the payment is made – but they also need to consider the hefty costs of chasing late payments, which takes time and effort for accounts/receivable employees. Other costs associated with late payments could include the cost of bank financing to cover the shortfall or the impact of having to pay suppliers late, thereby damaging the supply chain relationship (which could lead to less favourable pricing in future?). Then there are any other legal or court fees if the late payment becomes a non-payment. Overall, most agree that late payment is a terrible business practice.
Michael Hinson, CFO at the a non-profit benchmarking company APQC, outlines an interesting correlation between the lateness of payments and the business's performance. Based on APQC benchmarks, Hinson says that companies considered to be 'top performers' take 46 days or longer to pay their bills, while 'bottom performers' pay their suppliers in 27 days or less.
So it seems that companies looking to extend their day's payables outstanding (DPO) aren't doing it because they're strapped for cash. In fact they are financially healthy. They just want to maintain their levels of working capital. Another factor, mentioned by 45 per cent of companies that said they favoured long payment terms, is shareholder pressure to “protect their balance-sheet profile”. This is an interesting angle and it's for corporate CFOs and treasury professionals to tread this delicate line between maintaining shareholder confidence but behaving reasonably and fairly towards vendors and suppliers. Both shareholders and suppliers are important to the company but ultimately, a business can't function without a healthy supply chain, much of which depends on good business relationships.
Hinson sums it up when he writes: “When large, global companies slow down payments to suppliers to cushion their own books, America’s smaller businesses suffer the most.”
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