Daily Archives: March 23, 2012

From the Land of D’OH: Timely Payments Make Effective Business

A recent SupplyManagement.com article on how Direct Payments Will Save Government £40 Million a Year caught my eye not because improving efficiency in an organization that spends Hundreds of Millions processing paper will, obviously, save Millions, but because of this paragraph:

The government estimates that ensuring SMEs get paid more promptly will enable them to run their businesses more cost-effectively and pass those savings back to the government. It will also improve the cash flow of small businesses and their ability to plan for future deals.

Supply Chain experts and leaders have been preaching this for years. Slow payments force suppliers to take loans, at terms that are significantly worse than what a large buying organization can get. Sometimes, to make payroll and secure cash-flow when buyers take 60, 90, and even 120 days to pay, small/new/perceived-risk supplier organizations have to borrow at 20%, 30%, and even 40% per annum. This substantially drives up their cost of doing business — a cost that will, inevitably, be passed to the buyer with the short-term mindset. If the buying organization pays on time, or, if it needs to, takes out a loan based on its credit terms, which could be only 6%, 5%, or 4%, to pay on time, the supplier can operate more cost effectively and pass on those savings to the buyer. It is that simple.

But this is a government organization. We should be happy they figured it out before Mayan Doomsday and not The Date Heard Around the World. (At least this way some of us will see the beginnings of a government organization coming to its senses during our lifetime.)

Of course, if the UK government really wants savings, it should mandate that the NHS follow this advice. As the world’s fifth largest employer, it spends £110 Billion a year and processes Millions of payments. That’s a huge savings opportunity!