The time it takes buyers to pay sellers is rising. Data from CapitalIQ shows that the average DPO of the S&P 1500 is just under 49 days. This is up from 46 days in 2012.
We understand why this is happening. Companies get a short-term working capital benefit when taking longer to pay sellers. But, the truth is, this strategy does more harm than good in the long run because it negatively affects the buyer-seller relationship. Whereas paying sellers promptly is good for business because it promotes a happy, healthy, and stable supply chain. This unlocks a host of benefits that gives the company a strategic advantage over its competitors.
Some of these benefits were outlined in a recent webinar featuring Phillip King, Chief Executive at the Chartered Institute of Credit Management, Julian Roberts
Director, Working Capital Advisory at HSBC, and Tim Annis, Director Fintech Alliances EMEA at Tradeshift.
Here’s what they had to say:
Reliability
SMEs struggle with cash flow. Even a slight delay in payment can create insurmountable issues. This is why up to 50,000 businesses go bust each year in the UK alone due to cash flow shortages. So businesses must make sure they’re paying sellers promptly if they want them to continue providing their products and services. This is especially important if the seller is highly strategic or provides unique products and services.
Responsibility
Businesses are increasingly taking corporate and social responsibility (CSR) more seriously. Not just because businesses should do the right thing, but also because there is a direct link forming between responsibility and profitability. And a responsible payment culture that treats sellers fairly must be part of every company’s CSR agenda. This is just one reason more and more companies are signing up to the Prompt Payment Code in the UK and governments in places like France are regulating stricter payment terms.
Credibility
Withholding seller payments might yield short-term cash flow benefits, but it’s a strategy that will damage your company’s credibility in the long run. And when a company loses credibility, it risks losing business and profit as well. This is especially true in places like the UK, where the government is barring companies with poor payment practices from bidding on public sector contracts worth over £5 million. Businesses should think carefully next time they discuss withholding seller payments, is it worth risking the credibility the company has established?
Making prompt payment good business
Despite these compelling reasons to pay sellers promptly, old habits die hard, and too many companies take their sellers for granted. They treat them poorly and harm them — sometimes fatally.
Now we understand the business realities behind pushing out payment terms or delaying payments, but businesses can do this without harming their sellers. The secret is in leveraging various financing solutions, such as supply chain finance.
So if your company isn’t paying its sellers promptly, look at the reasons why. Then see if you can change processes or harness tools and solutions to speed things up. When you do, you’ll see quickly that paying promptly is good business.
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