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Buying and Paying - Why paying your suppliers on time is good for your business

Business Practice

As a purchaser, you must foster good relationships with your suppliers. They are important to you.

Some large firms, such as Shell, IBM and Ford, who buy huge volumes from thousands of individual suppliers, issue guidance literature on payment procedures. This helps suppliers to understand the timing of payment procedures, how best to present invoices and how to follow up unpaid items and disputes.

Even if your company does not go to such lengths to foster good relationships, try to ensure that your staff operate reliable payment procedures.

Payment Policy

  • Do you have clear, written instructions on payment of bills?
  • Are all finance and purchasing staff aware of them?
  • Do buying and payments functions work together to provide a total quality service?
  • Is the payment policy being monitored to ensure that it works?
  • Are you confident that there are no embarrassing arrears which may cause supply interruptions, writs and audit qualifications?
  • Do you have rapid clearance of account disputes and are your customer service staff properly involved in them?

Payment Terms and Breach of Contract

Sellers normally stipulate conditions of sale. In practice, the power of a large purchaser often means that it can impose its own terms. Buyers should, however, ensure that any variations to the seller's standard terms are agreed by both parties.

An example is the condition of sale relating to the allowed period of credit, (i.e. the 'payment term'). When an order is placed for specific goods or services at an agreed price payable at an agreed date, all those aspects are legally binding. Delaying payment is in breach of contract terms.

Negotiating the Payment Terms

Any contractual term is only valid if it is agreed at the order stage. Consider the opportunities for negotiation before the contract is made:

  • A sales representative may telephone or visit;
  • A catalogue or price list may be held by you;
  • You may make an enquiry or request a quotation;
  • A supplier may submit an official tender.


In any of these, a supplier may state standard credit terms, e.g. '30 days from date of invoice'.

The seller always has a cost in allowing time to pay. Borrowing at 12% pa, for example, will cost 1% of the invoiced value for each 30 days credit. The price may include 1% for the standard term but the cost of unplanned payment delays has to be absorbed by the seller as a reduced profit margin.

The credit terms you require should be properly negotiated and adhered to. If you do nothing to contest the seller's terms at the order stage you should not then just pay when it suits you.

In a typical good negotiation on payment terms, a seller with terms of 30 days resists your request for 60 days; but quantifies it as a cost of 2% and agrees a different kind of benefit, such as a price discount, earlier delivery or a stockholding for an agreed period.

A Variable Payment Policy

Sheer volume requires many large organisations to have computerised cheque runs at set dates each month. No system, however, should be allowed to produce payments at dates later than agreed terms, and flexibility should always be possible.

Any system can be overridden when special payments are needed, e.g. casual labour or emergency suppliers can be paid with a manual cheque. Overdue debts can also be settled on demand, if the will is there.

Many firms have selected accounts which get priority payment treatment, for various reasons. Some have an enlightened policy of paying all small firms quickly. This also has the advantage of clearing the majority volume of paperwork.

A policy of deliberately delaying payments can be costly when purchasing staff have negotiated favourable deals with suppliers in return for prompt payment. It may well be a breach of contract in law; and it can permanently damage working relationships with your suppliers.

An Appeal to all buyers

Pay on time and help the UK economy to be more competitive in the world market.

 
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