It’s the new normal: big companies are paying their bills late, later, and latest.
When economic hard times hit in 2007–2008, CFOs and finance departments felt pressure to improve their organizations’ working capital positions. The longer companies could hold on to cash, the more liquid they were, and the safer they felt. Paying bills quickly meant dipping into cash reserves, possibly taking away money from new-product development, mergers and acquisitions, marketing, or anything else that might drive top-line revenue. It was either that or be forced to rely for growth on expensive external financing.
Everyone knew that when it came to days payable outstanding, longer was better.
However, before the recession, many companies were reluctant to embark on payment-term extension programs for fear of disrupting their supply chains, losing suppliers, or forcing them to raise their prices. But in the face of what looked like economic Armageddon, such considerations seemed less compelling than bolstering working capital. Therefore, many large companies began telling suppliers (especially the smaller ones providing noncore or indirect goods and services) that payment schedules would be extended from 30 days to 45 days, or from 60 days to 90 days, and sometimes beyond.
To their surprise, it worked.
According to Veronica Heald, Hackett group director and practice leader at REL Consultancy, which focuses on working capital, those big companies experienced “not nearly as much pushback from suppliers as they expected.”
During the financial crisis, she explains, small businesses, losing revenue, were afraid to challenge their big customers, and so bit the bullet and accepted whatever payment terms were offered. Today, big businesses are sitting on mountains of cash, and delaying payments as long as possible has become, as Heald says, “the new normal. Lots of organizations survived the downturn by getting smarter. They went through cost-cutting; improved working capital, and saw the benefits of extending payables.” Today, she says, extending payables is a best practice, and a good way to grow cash mountain.
Not coincidentally, according to a 2012 Experian/Moody’s Small Business Credit Index study, severe delinquencies (invoices more than 90 days past due) climbed 11% in the first three quarters of 2011. And as a 2012 National Federation of Independent Business report says, purchasers “want to extend payment as long as possible. . . . This is one area where large firms often take advantage of their market power to strong-arm small-business suppliers and customers.”
“The practices of the downturn have turned into business as usual,” says Larry Marion, chief executive officer of Triangle Publishing Services, which produces reports, white papers, and custom publications for midsize and Fortune 500 businesses. “Just last week,” Marion says, “a customer of many years who had been paying on a 30-day schedule tried to change the contractual language for all new projects to 60 days.
“That same week,” he continues, “I noticed a 30-day payment had not shown up. I contacted the accounts-payable department and they said that’s scheduled for 45 days. I said, ‘No, I have an agreement.’ They said 45 days was their policy.”
What did Marion do? In the first case, he told his client that his quote was based on 30 days, not 60, and if it had to be 60, he’d have to increase his quote by 10%. “It went back to 30 days,” he says.
In the latter case, he circumvented accounts payable, spoke directly with his client, and told him he’d like to bill him earlier. “Instead of getting paid when we finish,” Marion proposed, “I’ll bill you when we’re halfway finished to recover from the 45 days.” The client accepted Marion’s terms.
Heald applauds Marion’s gumption. “Don’t accept the customer’s terms as a foregone conclusion,” she advises. “When companies embark on payment-term pushback programs, they’re expecting resistance. Sometimes, if the supplier complains, they’ll just put [it] back on the old program. I’ve seen this from huge, huge corporations. They don’t have the desire to manage negotiations. They’re just hoping 80% or so of their suppliers will accept it without complaint.”
Heald and Marion have the following seven strategic suggestions for how small businesses can resist extended payment terms and negotiate with their larger customers.
There are electronic procurement platforms, such as Ariba’s, that allow for automated dynamic discounting, in which a supplier can say, “If you pay me on day 10, take a 2% discount; if you pay me on day 20, no discount; and if you pay me on day 30, the price rises.” But this requires the technology to get on the platform or others like it. If that’s not feasible, Heald strongly urges small-business people to “pursue every avenue” to resist extended payment terms “without being overly aggressive. Think strategically. Ask yourself how you can connect with someone who’s willing to compromise; who’s willing to work something out.”
Remember: it’s always a hassle for your customer to find a new (and good) supplier.