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The perfect payment world - will it ever exist? 

Posted on Monday, July 6 by Registered CommenterDavid Rae in , , , | Comments7 Comments

Depending on who you speak to, increasing supplier payment terms is either an excellent - and ultimately rather easy - way to free up cash, or it's a morally-indefensible practice used by bullyboy, large corporates. 

Either way, it's happening. I recently asked a roomful of CPOs how many were actively extending payment terms, and everyone raised their hands. Some a little bit more tentatively than others, but all were pointing to the sky in the end. 

Having regaled this story to the head of a UK shared services centre at a Basware-organised roundtable on payment perceptions the other day, he was horrified. In fact, I think the word he used was "outrageous" and I don't think I'm too far from the truth by saying that he views extending payment terms, especially in today's climate, as plain wrong. 

It's an interesting conundrum. On the one hand, it seems a little disengenuous to extend payment terms simply because you can. On the other, in these difficult times, maximising shareholder value is all about cash management...

So which camp are you in?  

One well-known investment bank is firmly in the moral camp. The firm in question sticks religiously to a 30-day payment rule due to reputational issues. It wants to be seen as a responsible payer as it believes, in the long run, this will help business. 

Not only this, but it also forces payment terms down its supply chain. When a tier 2 supplier complained about a tier 1 supplier not paying up in 30 days, for example, the bank got involved and forced the payments through.

As Jamie Taylor, business development manager at Basware, described it, "payment-term utopia"...

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Reader Comments (7)

The lengthening of payment terms from my viewpoint is a direct response to the accounts receivable issue companies face.

Having come from the retail supplier environment where terms continue to lengthen along with other givebacks and deductions companies must manage their cashflows in aligment with how their customers pay. In my experience the average payment cycle for a retail supplier is approximately 60 days.
With that being said it is difficult for a distributor or manufacturer to pay in 30 days to their suppliers.

If this cycle is to be reversed then it needs to start at the top of the food chain and work its way down.

The growth of international trade which for many years has required up front payments also aided in the lengthening of payment terms to domestic suppliers. The trend has changed but when you included the freight time for goods there is still a timing issue.

The present credit situation does not help matters and if the trend does not change then the lack of cash will continue to keep the number odf bankruptcies on the rise.

Managing cash flow is a function that the entire staff involved with spending or managing money must participate in.

Bruce Rubin
July 7, 2009 | Unregistered CommenterBruce Rubin
Morally and ethically, a company should pay according to the terms negotiated. If longer payment terms are required, then it is the responsibility of the Purchasing ogranization for the buying company to negotiate longer terms.

The reality is that nothing is free. For those that think they get extended payment terms for nothing are mistaking. Sellers have the same cash flow issues as buyers. The selling price is likely adjusted by the seller at the next price change to make up for any terms extension that may have been taken without the seller's approval. The best practice is to look at total cost of ownership which looks at all the components of cost- for example, frieght terms, payment terms, price, lead time, total landed cost, etc. Looking at one component of total cost of ownership alone is naive.
July 7, 2009 | Unregistered Commenterrj sparks
RJ Sparks is right but there is a method of gaining a win win. Look up EZD on www.ezdglobal.com. The offer a SCF solution which enables buyers to pay upfront (how much discount is that worth!!) but extend payment terms to 60 -90 days+ without leveraging the balance sheet of buyer or vendor. The business focusses on de-risking the possible executions risks in the supply chain by managing both the physical and financial flows and involves counter-parties collaboratively. The cash release is alternate to the counterparties funding so the vendor and supplier are not using valuable cash resources to fund the supply chain.
July 13, 2009 | Unregistered CommenterPhil Lavin
In the US procurement negotiates for prepay discounts as this is a good for both parties. My experience in the UK is that terms can typically be 60 days.

Question: How much is 2% 10 Net 30 worth?
Answer: a lot…
The Math
2/98 = .0204
The number of times you can receive discounts 10 days vs. 30 days is a difference of 20 days. 360 days per year divided by 20 = 18 times.
18 times per year * 2.04% equals a net savings to the company of 36.72% savings of your average order value over the course of the year assuming constant and consistent levels of purchasing.
July 14, 2009 | Unregistered CommenterHenry
In the economy we face today many business owners feel they need to extend credit to their customers to remain competive. They in essence are providing a interest free loan, which your local bank will not provide. The perfect payment system is Accounts Receivable Funding. This takes the worry of receiving payment in a timely manner away from the business that created the invoice requiring payment. Why wait 60 days to be paid, when you can be paid in 3-10 days or less?
July 14, 2009 | Unregistered CommenterDavid Bailey
Much depends, in my opinion, on the company's ability to actually meet the payment terms.

To me Net 30, Net 45, Net 1000 is all lip service. It's whatever both sides will agree to in the contract.

I have been able to successfully get suppliers to consistently agree to Net 45 because my company actually pays Net 45. Where suppliers should be rioting is when Net 30 is negotiated in the contract, but they really get paid Net 90 (or worse).

Extending terms may not be so bad if companies can actually pay when they say they will pay.
July 14, 2009 | Unregistered CommenterProcurement Chronicles
The next time you have a problem arise with a payment issue, please refer these people to me. I will work digilently to assist them with the perfect payment system. This will be a great relationship builder for you and your suppliers. When they see you are offering them a solution to the needs of their business instead of another delay they will look to you in a different manner, and this will stop those repeated calls with payment requests. Create a win-win situation for both you and your suppliers!

Thank you,
David Bailey
Perpetual Funding Group
678-601-3584
July 17, 2009 | Unregistered CommenterDavid Bailey

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