Payment terms – why we’re bucking the trend
This weekend saw more headlines about payment terms given by the big fmcg companies, all of whom happen to be our clients.
Whether it be Premier Foods and their alleged ‘cash for contracts’ demands, 2 Sisters Food Group with their alleged 3% discount requirements for paying within 90 days or Heinz allegedly telling their suppliers that their payment terms have moved from 45 days to up to 97 (none of which, it’s worth noting, we’ve experienced).
The stories don’t mention the majority who pay promptly within 30 or 45 days.
They also (so far) don’t include others who have suggested a discount year on year for ‘loyalty’, nor the 120-day payment terms (some start counting from when the project has completed, not when the contract has been signed), some of whom are based in mainland Europe.
Why do these terms exist?
They exist because no one fights them.
They exist because of the size and the potential spend of these organisations.
Of course it wouldn’t be sustainable in any other circumstances. Good luck getting the extension done with those terms.
But how many firms can turn down working with some of the biggest companies in the world? Making a stand is one thing, but the priority is making sure you still have a business the following month.
I do not blame any of my contacts at these companies. Of course not. It’s not down to them that their company is set up with such terms. In fact, I genuinely believe many are embarrassed by their company’s payment terms, often offering an apology whilst highlighting the terms that exist. They know it’s not fair, they know it’s effectively a mini-tax, yet they can’t do anything about it, nor would I expect them to. Make a stand yes, but the priority is keeping your job.
Looking at the motivations behind it, it would be tempting to point the finger directly at the Finance Directors chasing profit for their organisations, but that’s probably not fair..
The people who they supply to (the retailers in most cases) also have some questions to answer.
What are their payment terms, what barrels do they hold their suppliers over?
You only have to look at my colleague’s post from last year for a start. I’ve also since heard of one retailer here in the UK threatening suppliers with exclusion from being listed if they so much as speak with the up and coming discounters. Anyone that watched Panorama on the BBC about Tesco will have seen the supplier/retailer relationship explained.
It wasn’t pretty.
It’s also not for us.
If we did business that way, we wouldn’t have a business.
We rely on having high levels of loyalty & trust with our suppliers, something that drives reliability meaning we can deliver the best possible product in the quickest possible time for our clients.
Who are our suppliers going to do a job for first? Who will they work harder for? Who will they be unquestioningly loyal to? The one who pays them within 7 days every time? Or the one that takes 120 and/or asks them for a rebate every year. And who, for that matter, are they likely to give the best price to?
That’s why we have our 7-day payment terms. You could call us stupid because yes, it puts massive cash flow pressures on our organisation paying out for a project in 7 days and sometimes waiting another 113 for the payments to cover it, but that’s our call. We know the way we want to do business. We know what we want to get from our suppliers. And what we get gives us the best possible product.
If the bigger companies want to support innovative and emerging firms, then perhaps there needs to be a code of conduct they could sign up to for on how they deal specifically with firms with turnovers under a certain amount.
That code of conduct would guarantee 30 or 45 day payment terms.
It would offer different terms and conditions to the generic ones used for the multi million pound contracts. It would be an understanding that small businesses don’t have teams of lawyers ready to spend hours going through 50 page legal documents, but also don’t want to sign away their business.
I think these innovative and emerging firms would work even harder for companies that supported such a scheme. Word would spread. And everyone would stand to benefit.