As well as being unethical, the practice of deliberately paying later than the agreed terms is wrong for sound economic reasons:
Late payment can also be symptomatic of poor relationships between you and your suppliers.
The way you manage your purchasing/sales relationship is important to your profit margins. A commitment by you to prompt payment can be a powerful aid to better buying; it will certainly produce closer, more co-operative partnerships between your firm and your suppliers.
Large corporations in particular enjoy considerable purchasing power. That power carries responsibility. The flow of cash in the economy begins with large organisations and should cascade, not trickle, down the chain of suppliers.
Paying on agreed terms injects more money into UK industry; existing suppliers are kept healthy; new firms are encouraged to compete in the supply arena; buyers benefit from a wider range of supply sources and the UK economy becomes more competitive in the world market.
You can gain in reputation and buying power when you commit to prompt payment
Your suppliers' incentive for reliability will enable you to give reliable service to customers and help you to improve your terms.
Closer cooperation with your suppliers can lead to wider benefits like suggestions for more efficient delivery patterns, or new insight into alternatives for components or supplies.
Customers with concern for efficiency and responsibility in business practice will reward your commitment.
By working together to change a culture of late payment, businesses that pay promptly are keeping existing suppliers healthy, encouraging new suppliers and helping to make the UK economy more competitive in the world market.
One in four business failures are a direct result of interruptions to cashflow
90% of business owners say that they would pay their suppliers on time if their customers paid them on time
Over 40% of small to medium sized enterprises would stop doing business with a customer that paid them late
Only one third of PLCs pay their bills within 30 days and over four years there has been no improvement in average payment times of plcs
Have a top management policy on prompt payment of bills. Ensure that all staff are aware of it, especially but not only those in finance and purchasing.
Agree terms of payment at the start of all contracts.
Monitor your payment system regularly for timely payment of invoices
Have a good system for clearing disputes quickly.
Foster good relationships with suppliers by informing them of your payment procedures and who is responsible.
Promote healthy cash flow in both directions with efficient collection for your own sales.
As a director or senior manager, you are best placed to foster a culture of prompt payment within your organisation. These are the actions you can take.
This section offers advice and guidance to small businesses on how to collect money owed to you and reduce bad debt losses. Prompt payment is an issue for everyone involved in the management and customer relations areas of a company, it should not just be read by sales or accounts staff.
The information for suppliers looks at preventative measures and possible ways of reducing the risk of late payment and bad debts. It also looks at the specifics of getting paid and how to manage credit and recover debts quickly and effectively.
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.
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.
Any contractual term is only valid if it is agreed at the order stage. Consider the opportunities for negotiation before the contract is made:
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.
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.
Pay on time and help the UK economy to be more competitive in the world market.
It is important that directors and senior managers work hard to foster a culture of prompt payment within their organisation. The following actions will help create and maintain a speedy payment process:
Suppliers are important to you. Without them you have no customers. So treat them fairly and they will, in turn, look after you:
DO NOT Reduce your bank borrowing with unauthorised free credit taken from suppliers.
DO NOT Use the financial strength of your organisation to impose abnormally extended terms of payment.
DO NOT Rate suppliers for payment in an order which reflects their bargaining power.
DO NOT Use a minor invoice error as an excuse to delay payment when you have had the benefit of a good product or service.
DO NOT Restrict the financing options of your suppliers by including such restrictive clauses as 'ban on assignment'.
DO NOT Condone a hostile payments relationship which does not match the friendly purchasing one.
Information technology can greatly enhance purchasing and supply management processes through the adoption of ePurchasing systems. ePurchasing has the potential to facilitate communications between purchasers and suppliers. It can reduce errors, speed up payment times, reduce the need to hold stock, improve supplier performance, reduce transaction costs and improve delivery accuracy. If you would like to know more on how it can benefit your organisation, find out more at the Chartered Institute of Purchase and Supply's website at www.cips.org
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