Lengthening payment terms: it’s worse than tax avoidance

By on June 25, 2013

If we want a new index of corporate responsibility, let’s move on from corporation tax and look at the current debate over supplier payment terms, argues Fishburn Hedges director John Williams.

The tip of the iceberg has been the recent announcements to the advertising industry (and other commodity suppliers): first Procter & Gamble announced an average extension of payment terms from 45 days to 75; then Mondelez, the spin-off from Kraft, said that from next month its terms would be 120 days. This is not just an ad industry issue, but a worrying trend for sustainable supply chains.

Why is this happening? All the public rhetoric around supply chains is that you need to nurture them; treat them as partners, not just suppliers; and recognise they are vital to your business success, from sales to reputation. Otherwise you risk everything from interruption of supplies to the opprobrium when the factory a tier 3 supplier is using collapses. Supply chains need to be sustainable, and if you squeeze them too hard, ultimately everyone will suffer. You squeeze not just relationships – goodwill and commitment – but also the funds for your suppliers to invest and innovate.

Payment terms are not about pricing, but a different source of vice. We all know that in keeping a business afloat, cashflow is king, and slowing that flow is potentially disastrous. Conversely, hoarding it, and paying as late as you can manage it, protects your business. And improves your balance sheet. The Eurozone crisis has added to that lesson. Indeed, I have come across one company that, in Southern Europe, is incentivising its salesforce not by volume but by cash collection. Remember what it was like for traders in Malta when it temporarily became a cash-only economy.

You can imagine that, for practical reasons, a struggling business may try to delay payments when there is literally not enough money in the bank. But the leaders here are global companies; they are at the top of the supply chain. They set the tone; they set the rules of the supply chain. If anyone can afford to pay fast, they can.

If their commitment to corporate responsibility meant anything, they should be speeding up global cashflow by shortening payment terms – as my old client C&A used to do. They paid every invoice from us by return. Partly, I suspect, because they did not want to be obligated to any supplier. But also because, as a family business with a strong ethical and moral culture, it was the right thing to do. The alternative is that you are effectively asking your smaller suppliers to act as your bankers and lend you money.

So, again, why is this happening? There wasn’t much help from Mondelez, who gave a quote to the Financial Times on 30 May.

‘Extending our payment terms allows us to better align with industry and make sure we compete on fair grounds, while simultaneously improving transparency and predictability of payment processes,’ a spokesperson said.

This makes it sound both like a favour to suppliers while arguing that everyone else is doing it so it’s only fair for us. Hmm. The irony of all this is that these companies are also offering to lend money to their suppliers to bridge the shortfall. Mondelez’s letter to suppliers, quoted in the FT, added that this was ‘in order to remain competitive, reflect current industry standards and drive world-class growth’. Suppliers – and consumers – might argue there’s nothing world class about late payments.

This may not get commentators as steamed up as tax avoidance, but it should. It’s indicative of a failure to take an integrated view of sustainability and corporate responsibility.

Small businesses should not be subbing their biggest customers. It’s no good investing in communities if you don’t invest in suppliers. We need more ethical economics than this. Chief sustainability officers should not just be obsessed with carbon footprints, but supplier terms. Let’s ask every company to publish their supplier payment terms and press them to be truly responsible and shorten them.

Or, for consistency’s sake, let’s have them all extend this to their most important suppliers: their staff. Surely it is only logical to say to new employees – ‘thanks for joining us; work hard, and your first paycheque is in 120 days. But we’ll give you a loan to tide you over’.

But now I’m giving them ideas…

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