Getting paid on your terms
Supermarket study
Research just published shows that supermarkets take an average of 42 days to pay. As an SME you’d probably appreciate that kind of turnaround, however the figures are not quite what they seem. If you could strip out the fuel payments for example, where suppliers want paying in five days maximum, then the figure would be much higher. Indeed, most of the invoices are paid outside 30 days, with 15% over 60 days.
Of course, these longer terms are often what suppliers have agreed to. You can’t blame the likes of Tesco for that because it is simply good business: the longer the terms the better for their own cash flow.
It’s a deal
Negotiating terms with new customers and suppliers is part and parcel of business life. But you can end up with a great deal or a terrible one. And it’s easy for bigger firms to push the terms out because they hold all the power.
Key considerations. Whilst the lure of new business in the current climate is tantalising, especially if it’s a big contract, you still need to consider the implications for your cash flow. Things to think about include the:
size of the contract
business you are negotiating with
profit margin you’ll make.
Tip. Before negotiating, decide what is most important to you. Is it the margin or the cash flow? Don’t be afraid to increase the price if the payment terms are extended, especially if it will create issues with cash flow. Sometimes it might be better to take a slightly lower price but get paid more quickly.
Example. Acom has the chance to secure a deal with a new customer, supplying widgets. This amounts to 10% of its production volume. The terms proposed are 45 days but Acom requires 30 days in order to pay its suppliers and maintain a healthy cash flow. The other party isn’t budging so Acom offers two prices: a higher one at 45-day terms and a lower one at 30 days.
The supermarkets in the research discussed above paid 3% of invoices outside the agreed terms. This is low because: (1) their policies have been under scrutiny; and (2) they manage to agree long terms or get suppliers signed up to “pay me early” schemes (basically the retailer pays less for the products if they settle invoices quickly). Tip. If you are negotiating with new, big, clients also make sure you check their record. This can be done in a few seconds online (see The next step ).
Your fault
The excuses for late payments often include “errors on invoices” - in other words it’s the supplier’s fault not theirs. There are simple ways to avoid this: (1) make your terms crystal clear; (2) send invoices promptly; (3) set a read receipt on e-invoices; and (4) ensure the document is accurate and simple with all the information required.
Example. Acom has annual turnover including VAT of £3.65m, which means each day’s delay in payment reduces cash inflow by £10,000 (£3.65m/365 days). Usually it sends invoices out at the end of the month, e.g. 30 June, but if it sends them when orders are completed, e.g. 22 June, cash flow is improved dramatically (£80,000).
To check payment history, visit http://tipsandadvice-business.co.uk/download (CD 21.18.07).
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