Category Archives: Finance

Minimizing Late Payments

In yesterday’s post, that said don’t take late payments lying down, we noted that big customers are trying to push payment terms to ridiculous extremes and that their fantasy should not be your reality. We referenced a good article over on CFO.com that gave some advice on what do to “when your big customer wants to pay late” and concluded that if none of those tips help you out, then you should do what Pete Loughlin suggests on Purchasing Insight and name and shame them publicly. No one should ever think that 200+ day payment terms are fair. EVER!

Hopefully you’ll be one of the lucky ones and not find yourself in this situation, but, to be frank, that is not likely unless you take steps to avoid being in the situation. To that end, a recent piece in Inbound Logistics that offered some advice from Scott Pezza, a research analyst at the Aberdeen Group, had some good suggestions that you should always keep in mind.

  • Conduct Pre-Sales Credit & Risk Analysis
    You want to identify problem payers before you sign the contract. One method to do this is the credit bureaus. Another is quick calls to other suppliers. Accountants, believe it or not, are people too and, speaking the same language, they like to talk to each other. They have skills that go beyond the general ledger that your organization should be making maximum use of. Basically, if the customer always pays six months late, then you probably don’t want to turn away the business, because a paying customer is a paying customer, but you’re going to want to adjust your terms accordingly. This may mean jacking the price up (and offering early payment discounts) or forcing the customer to agree to interest and penalties. But if the customer has a history of trying to evade payments that will require significant and costly collection efforts, you probably want to turn that customer away.
  • Follow the Finances
    Don’t just use the credit bureaus to assess pre-sale credit risk, keep on top of their financials. Subscribe to a credit monitoring service that gives you quarterly updates, or a news monitoring service that tracks major stories, and get a grip on when their financial situation may be going south fast so you can get paid, or get out, before you have a situation where the relationship is not worth it.
  • Standardize Receivable, Collection, and Resolution Processes
    Always send out complete and accurate invoices, have a common approach to collection efforts, and standardize resolution processes that involve multiple parties to make it simple for the customer to understand your concerns, share theirs, and reach a resolution in a clear and concise process.
  • Make Getting Paid Easy
    Send invoices in customer’s preferred formats and, if you can, accept whatever payment method the customer wants to use – be it purchasing card, wire, ACH, or old-fashioned cheque.
  • Be willing to Negotiate Payment Terms on a Customer by Customer Basis
    Scott actually suggests to tailor collections to individual customers, but it’s better to tailor contract and payment terms and to be willing to renegotiate if the customer needs to (provided the customer really does have restricted cash-flow and is willing to make best efforts to pay on a reasonable schedule — don’t renegotiate just because they don’t want to touch the 10 Million reserve in the bank).

Hopefully these tips will help you avoid the late payment fiasco and having to name and shame your customer.

Don’t Take Late Payments Lying Down

As pointed out repeatedly by Pete Loughlin over on Purchasing Insight (and in this recent post on “social media the new weapon to combat late payment”) and SI (including this recent Blue Friday post), big customers are trying to push payment terms to ridiculous extremes and, frankly, hoping their suppliers will bend over and take it without any resistance. But just because it’s their fantasy, it doesn’t mean it should be your reality. You have to stand up for yourself and help bring this foolishness to an end.

How do you do it? A recent article over on CFO.com on what to do “when your big customer wants to pay late” had some great advice. Summarizing, and extending, it, we can see that you should:

  • Know Your Worth
    Chances are that you are providing a unique value and you should not be afraid to make it clear. And if it’s really unique, your customer doesn’t have (very m)any options besides you.
  • Understand the Relationship
    Has it been a long term relationship? A good relationship? Have you been paid on time regularly in the past? Have you been providing value over and above committed levels? If the relationship has been good, if you were contracted to provide a product but have also been providing free value-add consulting, if you were always paid on time for always delivering on time and maintained a good relationship, point that out.
  • Create Flexible Payment Strategies
    This doesn’t (necessarily) mean early payment discounts, but it could include such for (really) fast payments. Consider multiple (milestone-based) billings that the customer can digest over time, rather than one big bill at the end (within reason).
  • Avoid the Procrastinating Accounts Payable (AP) Department
    They are the boneheads that still believe extending DPO is a good thing (even though a recent Hackett study demonstrated that playing this game actually costs them an extra 10% in the end). Deal with Procurement and/or the buying organization who have a better chance of understanding that delaying payments unnecessarily only hurts everyone in the long run.
  • Suggest Financing
    where the customer enters into a relationship with a bank who pays you right away, at a small discount, and then the customer pays the bank on their schedule, for a fee. Done right, it’s better (for you) than an early payment discount as its an immediate payment.

and if all that doesn’t work, do what Pete suggests:

  • Name and Shame Them Publicly
    Be civil and respectful, but don’t be afraid to let the world know, in no uncertain terms, that they are either being deliberately cruel or incompetent.

SI likes Pete’s suggestion best, but agrees that you should try the more professional methods listed in the CFO article first. But if they don’t work …

Some Decent Tactics for Working Capital Management Improvement

A recent white-paper by GT Nexus on “Holistic Supply Chain Management” had some decent tips for improving WCM (Working Capital Management) that, amazingly enough, didn’t focus on DPO extension at the expense of the struggling supplier. Because of this, SI is going to review some of the better tactics identified in the white-paper and recommend that you read it.

Remembering that the goal of working capital 101 is to improve the Cash Conversion Cycle (CCC), which is generally defined as DIO (Days Inventory Outstanding) + DSO (Days Sales Outstanding) – DPO (Days Payable Outstanding), there is more than one way to improve the CCC. You don’t have to increase DPO, you can decrease DIO or DSO.

Starting with DIO, the paper recommends to lower the amount of buffer stock needed to maintain customer service levels. While there is safety in safety stock, there is also cost in safety stock. Cost that is likely unnecessary when you consider that most companies have way more stock on hand then is needed when you add stock in transit, stock in production, and stock at other locations that could quickly be moved if necessary. As a result, a company needs less stock than it thinks it needs.

Moving on to DSO, the paper recommends to use a collaborative platform for shipment planning and execution. This allows the company to ensure that inventory doesn’t sit idle and is shipped as soon as sales come in and to make sure that the shipments reach the customer quickly to allow for faster invoicing, and subsequent payment.

It also has other recommendations to balance DIO and DSO, reduce COGS, and minimize errors, but the primary point is the important one — you don’t have to increase DPO to improve your CCC and WCM. Remember that.

You Need to Get a Handle on Your Global Trade Risks – FAST!

Because, if you don’t, in three months, one in every five shipments you make is going to result in a large fine! By the end of May, the United States Customs and Border Protection (CBP) is expected to issue a proposed rule that would make various changes to increase the accuracy and reliability of the advance information submitted under the Importer Security Filing (ISF or 10+2). No big deal, right? Wrong! It is further expected that the final ISF rule will follow later this year and that the CBP will, upon release of the new rule, begin to enforce (the full extent of) the penalties associated with the ISF.

This is a major risk for most organizations as the most recent statistic that is publicly available where 10+2 compliance is concerned is a compliance rate of 80%. In other words, 20% of shipments are not compliant! It’s hard to say why. It could be because, up until now, the CBP has not issued much (if anything) in the way of penalties for violations and failures, and many importers, (customers) brokers, and forwarders are taking advantage of the situation and not doing anything to improve their processes and procedures when they (regularly) make late and inaccurate filings. And if this is the case, this is a dangerous game — for you!

We have to remember that the CBP has the right to enforce a minimum fine of $5,000 for EACH 10+2 violation. If you do a lot of importing, this will add up fast if you are in violation with every fifth shipment. Even if you only did 10 inbound shipments a month, you could expect to lose at least 120K a year to fines! And that’s (significantly) more* than what an average mid-size organization can expect to pay for an annual license to a basic SaaS e-Trade Document management system these days. So they should get one, and begin to get a grip on their global trade risks, fast, before they burn money needlessly.

* A good (end-to-end) global trade management system will still run you six figures, but it goes way beyond e-Document management and provides multiple ROI in terms of process improvement, tactical man-hour reduction, global supply chain visibility, compliance monitoring, etc. (But if you’re small, or just getting started, you can start with just the e-Document management and ease your way into a bigger system.)