I have mixed reactions to the article “Need Cash? Look Inside Your Company” by Kevin Kaiser and S. David Young in the May Harvard Business Review. There’s no doubt that better working capital management can help lots of companies get through this difficult environment. At the same time, offloading your problems to your suppliers is a recipe for long-term difficulties.
I’m speaking of the practices around accounts payable management. The authors identify a mistake companies frequently make: assuming that receivables timelines and payables timelines are symmetrical. If I get paid net 30, I should pay net 30. Instead, they assert, each company should assess its environment, power over suppliers (or vice versa), and from there determine how it should pay/be paid. It may be possible to get paid by customers net 15, and pay suppliers net 60. This has a huge beneficial impact on a company’s working capital.
However, paying suppliers terribly late has nonfinancial costs. While a supplier may accept lengthy payment terms, there may be resentment, that can cause difficulties when contracts are renewed or new business contemplated. Suppliers may prioritize the needs of other customers who pay more timely. Other terms, such as delivery, might be tightened, which has impacts.
Worse than all this, though, is trying to changing payment terms unilaterally, or even invisibly. This is the old “hiding the invoice in the desk” trick, the “I didn’t get your invoice, please resend” trick, or the “phantom dispute” trick. In this case, the supplier negotiates net 30 terms but ends up getting paid at the whim of the customer. These kinds of techniques might be needed when you are truly distressed, but be prepared to be treated like a distressed company if you use them.
My experience, in account management, sales and executive leadership, has been overwhelmingly as a collector. Knowing that my company treated invoices from its suppliers as serious commitments helped me hold customers accountable to pay timely.
The authors are correct that companies should negotiate payment terms based on their strength in the situation and try to create an environment where they pay late and collect early. However, companies must live up to those negotiations. Don’t ignore payment terms or mess vendors around when their invoices come in.
Your collectors will thank you for it.
Related post:
If your key suppliers are in trouble, so are you
