#Payment terms: Level playing field?
Procurement more often than not reports into the CFO. When hiring and building out Procurement teams, the key motif is usually cost savings to be achieved on the significant third party cost base. And Procurement Heads, keen to prove their departments worth and looking to grow are happy to oblige. And indeed, cost benefits are and continue to be important Procurement metrics.
As part of the financial targets, CFOs expect to achieve extended payment terms with suppliers. Moving from 15 or 30 days to 60, 90 or even 120 days is becoming more common. The most extreme examples are company pushing payment terms to 180 days. This includes retailers pushing those terms onto farmers.
There has been some public backlash on the topic, coming from trade associations or equally large corporations, amongst them a creative agency behemoth. But not enough that companies don't still push payment extensions onto their suppliers indiscriminately. Procurement faced with a quick fix target often executes by changing payment terms with all suppliers without means of redress. If anything, the very large supplier who can better afford the upfront financing of wages and third party costs has an advantage negotiating an exception.
Clearly, from the perspective of a small company or a farmer being paid within 60 or 90 instead of 15 or 30 days matters. It matters because they holding a large cash reserve hampers their growth. It matters because they may not even be able to come up with the upfront cash as they don't have the same access to credit. It matters because they have to pay their staff on time. It matters because they don't have the same leverage over their suppliers.
And it matters because it's contrary to the corporate social responsibility commitments made by the same large companies that use their size and leverage to push such payment terms indiscriminately. That needs to be spelled out in black and white.
This is not taking an indiscriminate defending stance for suppliers either. But putting new payment terms in place should not be a quick shot, indiscriminate exercise. Understanding your suppliers' size, financial position, access to credit and turnover (and frequency of business) with you is crucial to draft a tiered payment term model that is supporting the CFOs agenda and ensuring equitable business practise.
Different payment terms may be appropriate for different types of spend, e.g. subcontractor and supplier third party spend may need to be settled with shorter payment terms. Payment schedule and frequency is another way to make cash flow more sustainable, but needs to be balanced with the operational cost of more frequent payments and the risk of paying early and missing financial leverage to get satisfactory delivery.
Procurement and Finance teams need to get better at understanding their supplier profiles much more. These days, reliable, relevant supplier information databases are a rarity. At best deep financial information is gathered when first on-boarding the supplier or in a one-off tender exercise. But other than that and ongoing monitoring for bankruptcy risks, there is little reliable information available to create financially and socially sensible payment terms.
We will be talking about payment terms and other financial, risk and contract topics from the point of view of the SME as well: Contracting, Risk and Finance (SME)
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