By Bill Camarda
In essence, suppliers – often, smaller firms – are increasingly financing their largest customers via continually extending B2B payment terms. This raises questions about the long-term sustainability of supply chains, in which B2B buyers depend on suppliers for everything from holding inventory to generating new business ideas.4 Driving financing costs onto suppliers could ultimately ricochet, forcing them to raise prices.
For the smaller companies waiting longer for B2B payments, however, there’s a more immediate question: How to safeguard their own cash flow.
The Hackett Group’s 2018 U.S. Working Capital Survey of America’s 1,000 largest non-financial companies found that Days Payables Outstanding (DPO) increased by 6 percent in 2017, rising from 53.3 to 57.4 days.5 This more than offset deterioration in Days Sales Outstanding (DSO) and Days Inventory Outstanding (DIO). The result: a faster cash conversion cycle, down from 37.3 days in 2015 to 33.8 days in 2017.6
As Hackett Group associate principal Craig Bailey told Spend Matters: “The primary strategy many companies are using to improve working capital performance is simply to hold back payments to suppliers, in some cases extending payment terms up to 120 days. Unfortunately, when companies extend payment terms it has significant impact on the DSO performance of their suppliers.”7
B2B payment terms well beyond 30 days became common in the wake of the Great Recession. However, Spend Matters notes that, now, DPO has hit the highest point in a decade, with the automotive, retail, and chemicals industries leading the way up.8
Bailey told CFO magazine that decisions to lengthen B2B payment terms aren’t just driven by large companies’ leverage over smaller suppliers, but by their seeking the same cash flow benefits their peers have already achieved by imposing lengthier payment delays. “If I’m paying my supplier on very favorable terms [to the supplier], I’m actually financing their ability to offer much more attractive terms to my competitor. So, you see this standardization, where extended terms become the new industry norm.”9 The savings to the enterprise can be significant: when Procter & Gamble introduced 75-day payment terms in 2013, it added hundreds of millions of dollars per year to cash flow.10
In some cases, enterprises have paired extended B2B payment terms with new financing options. Some work with their own banks to provide financing to suppliers at lower costs than they could get on their own. Others arrange for purchasers to buy a supplier’s receivable at a small discount, taking it off the supplier’s books.11 Others are integrating third-party trade financing alternatives directly into their e-invoicing or supplier portals.12
Supply chain expert Spyros Lekkakos points to reverse factoring as part of the solution. “A large company [the buyer] commits to paying invoices promptly to the factor [a bank], and the factor agrees to pay the supplier earlier than the due dates on its invoices to the buyer. The bank profits by charging fees for the service, the buyer benefits from the extended payment terms, and the supplier is able to get paid earlier and improve its cash-flow position.”13
In many cases, however, financing is either not available from the customer or not attractive to the supplier. Sometimes, the supplier might be able to use alternative funding sources, such as payment cards. But there could be other options to consider, as well, both immediately and over the long term. Here are five options suggested by various experts.
Know your competitive advantage and consider pushing back. As Hackett group director Veronica Heald told CFO, even small businesses can sometimes resist B2B payment delays if they know and can articulate their unique value to the customer – a lengthy and positive relationship, a lower price, or the difficulty the customer would have in finding a replacement for business-critical products and services.14
Focus on your direct client or procurement contacts, not accounts payable. As Heald put it: “AP is incentivized to improve cash-flow metrics. That’s all. Your client, you have a relationship with. Let him worry about AP.”15
Consider offering a small discount for immediate payment. If your customer doesn’t already offer or expect different early payment terms, consider the worth of offering a small incentive for rapid payment.16
Accelerate invoicing. Don’t invoice in batches: invoice as soon as the product or service is delivered.17 Service providers should look for ways to add interim billing milestones, so they don’t have to wait until the entire project is finished.18 Use e-invoicing solutions where they offer value, and if invoices must be submitted through a supplier portal, understand exactly how it works. Make sure all invoices are accurate, match the buyer’s information, and include the buyer’s purchase order. If invoices are being returned, look for patterns that could be causing the problem.19
Say no. Sometimes, suppliers just can’t afford to keep a customer with onerous terms. Know when too much is being asked – and use this as motivation to diversify the company’s base of customers.
Large companies are demanding longer B2B payment terms as part of their own cash flow strategies. In some cases, they are providing financing options that make the change easier to handle. But, in other cases, suppliers must take steps to protect themselves and their own cash flow.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Corporates Must Tread Lightly With Delayed Supplier Payment Tactic,” PYMNTS.COM; https://www.pymnts.com/news/b2b-payments/2018/hackett-group-corporate-supplier-payments/
2. “Hackett: U.S. Cos. Improve Working Capital Performance,” MarketWatch; https://www.marketwatch.com/press-release/hackett-us-cos-improve-working-capital-performance-2018-07-19
3. “Pressure in the System: Working Capital Study,” PwC; https://www.pwc.com/gx/en/working-capital-management-services/assets/working-capital-opportunity-2017-2018.pdf
4. “Viewpoint: The delusion of extending payment terms,” SCF Briefing; http://www.scfbriefing.com/viewpoint-the-delusion-of-extending-payment-terms/
5. “Working Capital Scorecard: Suppliers Can Wait,” CFO; http://ww2.cfo.com/cash-flow/2018/07/working-capital-scorecard-cash-conversion-cycle/
6. “Corporates Must Tread Lightly With Delayed Supplier Payment Tactic,” PYMNTS.COM; https://www.pymnts.com/news/b2b-payments/2018/hackett-group-corporate-supplier-payments/
7. “U.S. Companies Improve Working Capital Performance — But Is It at the Expense of Suppliers?,” Spend Matters; https://spendmatters.com/2018/08/06/u-s-companies-improve-working-capital-performance-but-is-it-at-the-expense-of-suppliers/
9. “Working Capital Scorecard: Suppliers Can Wait,” CFO; http://ww2.cfo.com/cash-flow/2018/07/working-capital-scorecard-cash-conversion-cycle/
10. “Big Companies Pay Later, Squeezing Their Suppliers,” New York Times; https://www.nytimes.com/2015/04/07/business/big-companies-pay-later-squeezing-their-suppliers.html
12. “3 Alternatives to Extending Payment Terms,” Sharespace; https://sharespace.digital/article/3-alternatives-extending-payment-terms
13. “How Delaying Payments Can Help Suppliers,” CFO; http://ww2.cfo.com/supply-chain/2016/08/delaying-payments-can-help-suppliers/
14. “When Your Big Customer Wants to Pay Late,” CFO; http://ww2.cfo.com/credit-capital/2013/01/when-your-big-customer-wants-to-pay-late/
16. “How to Deal with Late Payment,” MarketInvoice; https://www.marketinvoice.com/business-finance/how-to-deal-with-late-payment
18. “When Your Big Customer Wants to Pay Late,” CFO; http://ww2.cfo.com/credit-capital/2013/01/when-your-big-customer-wants-to-pay-late/
19. “How to Deal with Late Payment,” MarketInvoice; https://www.marketinvoice.com/business-finance/how-to-deal-with-late-payment