Last month, SupplyManagement.com ran an article titled Buy Now, Pay Later that examined the repercussions for suppliers, and ultimately your business, if you fail to settle your invoices on time. According to Experian, the average business takes more than two months (61 days) to pay its bills and evidence gathered by the Federation of Small Businesses (FS shows it is increasingly common for large companies to bully suppliers into accepting extended payment terms of 60, 90, or 120 days from invoice receipt.
As will be further discussed in the forthcoming wiki-paper on Supply Chain Finance, this is counter-productive to the cost savings initiatives such actions are often driven by. For starters, as estimated by the Forum of Private Business (FPD), 40% of business insolvencies in the UK are prompted by late or disputed payments. Furthermore, a European Commission (EC) review recently approximated that over 450,000 jobs are lost each year as a result of such delays.
Late payment can put extraordinary pressure on suppliers, especially small and medium sized suppliers, which often desperately need cash to purchase equipment, raw materials, and, most importantly, meet their payroll. Furthermore, in addition to cash flow problems caused by late payments, many firms incur significantly extra costs for the time and money spent chasing payments and securing interim financing, usually at exorbitantly high rates.
All these costs do nothing but drive up the supplier’s cost of operation, and effectively, the price they will need to charge in the future to maintain enough profitability to survive. So even though it looks like you’re getting a deal in the short term by extending payment terms, in the long term, you’re simply driving up your price – and risking a major supply disruption if your supplier goes out of business while waiting for you to pay.
So instead of extending Days Payable Outstanding, consider looking at other strategies that can lower your cost of operations – such as improving forecast accuracy, just in time production, and low cost financing options that are available to you, as a large company, and not your supplier. Better forecasts lead to less missed opportunities and a reduced need to clear inventory at significant markdowns, just in time production reduces inventory costs, which is much better than just shifting them to a third party, and financing your purchase at prime or less will cost everyone less in the long run that forcing a supplier to take out short term financing at 20% to 40% per annum.