Money Matters Autumn 2006 
 

Squeezing the supplier

Photo of men in a vice In many sectors, large firms are taking ‘a more active and systematic approach to managing their working capital’ – a euphemism for delaying paying suppliers as long as possible.

Stories in the press have highlighted the record of large retailers paying small suppliers late. The companies involved tended to deny the charges completely or dismiss the incidents as one-off blips. Some companies have been explicit about pushing out the number of days that they intend to take to pay creditors, while others take a more surreptitious approach and use delaying and stalling tactics to avoid paying by the due date.

The record of large companies paying their debts in a timely fashion has, on the whole, never been good, but two factors have contributed to the deteriorating situation. Companies that have been purchased by private equity companies are often under financial pressure from their new owners and are typically highly geared. One way to ease the financial pressure is to make their trade suppliers wait longer to be paid.

Another trend has been for an increasing number of large organisations to centralise their accounting function in shared service centres (SSCs), including management of the purchase ledger. When that happens, suppliers need to be clear about the procedures that are used by their customer’s SSCs. If a supplier does not follow the procedure required by the client – however difficult or unnecessary that may seem – it is likely that the invoice will not be approved. Queried invoices are also much less likely to be paid on time. The personal contact with a local accounts office is lost and suppliers often find it hard to speak to an SSC staff member to chase up their payment, or at least check on payment status.

Small suppliers are often ‘bullied’ into not chasing payment, according to the Federation of Small Businesses, adding that if a big client moves the goalposts, suppliers can find themselves in a very difficult situation. The Better Payment Group, a DTI sponsored lobby group, said that almost half of UK companies do not know how to charge interest on late payment, so they are failing to take advantage of late payment legislation.

The key to dealing with all customers, but especially large ones, is to set out the amount of credit at the start. Try to make clients accept your terms. Do not assume anything and make sure the agreement is in writing. If they insist on their own terms and conditions, check carefully what payment terms they are offering. If the payment period is longer than the normal terms in your industry and/or 30 days, try to negotiate a better deal.

Even if you have to accept terms that are not to your advantage, ensure that you keep on top of the situation so that you are paid by the due date. Check that you present invoices so they are passed for payment and find out who is responsible for paying you.

As far as possible it is not your company’s job to finance your customers.

 
 
  This newsletter is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The newsletter represents our understanding of law and HM Revenue & Customs practice as at September 2006.

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