Why Pay Providers on Time?
It is not news that buying on credit (open-account) dominates global trade. The International Chamber of Commerce (ICC) generally acknowledged that at least 80-85% of all global trade in 2010 was settled on open-account (OA) terms.
When buying on credit the buyer takes on the supply risk and is obliged to “match” a purchase order, shipping or warehouse data to the supplier invoice. This is seen as low-risk for the buyer as goods can be rejected on inspection for various reasons, and payment will only be made if a full match occurs and at conclusion of payment terms.
When selling on credit the supplier assumes all the credit risk. For small and medium enterprises (SMEs) cash flow is always a priority but they are often challenged with a lengthy cash conversion cycle due to 45/60/90 day payment terms, late or even non-payment. This risk was highlighted by a 2011 survey from the UK Federation of Small Businesses (FSB) which revealed that 73% of UK businesses were paid late in 2010/11 with the average SME being owed £27,000 at any one time.
A recent GTNews Treasury survey showed that nearly 50% of large UK corporate financial leaders said they’re more likely to extend supplier payment terms now than they were in 2011, increasing buyer-supplier tensions and increasing supplier credit risk.
Based on these dynamics, which don’t appear to be changing soon, why would I suggest that large buyers should want to pay suppliers on time, or even early..?
Supply Chain Disruption
The implications of supply chains failing are well known, and recent high profile geographic incidents in Asia have underlined this. Large buyers have in many ways compounded their supply chain risk by employing lean just-in-time practises to be more efficient, continually reducing costs by sourcing overseas, centralising distribution and manufacturing for economies of scale and by consolidating suppliers in the chain.
To reduce the impact of disruption and ensure business continuity many large corporates are re-examining their supply chains and implementing proactive strategies to mitigate risk such as dispersing their portfolio of suppliers and facilities. When examining risk, there are some common drivers that fall under ‘disruption’ such as natural disasters, war, terrorism (piracy!) and single-supplier dependence but perhaps one driver that buyers do have the most control over is supplier bankruptcy.
Paying on Time – Or early
Late payments, either through bad process or extension of payment terms is compounding credit risk for suppliers who are faced with the double-whammy of lack of access to credit and a longer cash conversion cycle.
SME lack of access to credit is well publicised and this was highlighted in 2011 when company insolvencies in the UK rose and one of the reasons cited by analysts was tight credit conditions. Getting paid on time is such a widespread challenge that the European Union has updated its late payments directive (due to be implemented in 2013) to ensure private companies settle their bills within 60 days. (The UK Forum for Private Business has been regularly naming and shaming poor payers since 2003)
Paying on time offers buyers a simple method of injecting liquidity into the supply chain. It reduces the need for suppliers to take high-cost financing options such as factoring receivables and asset-based lending and indirectly avoids supply chain disruptions through insolvency. Alternatively, some large buyers are optimising their own working capital by offering discounted early payments or by engaging in Supply Chain Finance (SCF) programs where banks offer alternative funding to suppliers by financing approved invoices (payables).
Unsurprisingly, by helping key suppliers reduce working capital concerns this helps their business run more efficiently and allows them to provide more value to you by investing in areas such as research and development. Isn’t it also logical that if your cost of goods is based on the supplier’s current cost of borrowing, by reducing the supplier’s need to borrow or enabling lower-cost financing options your cost of goods will reduce over time?
Getting There with e-Invoicing
In most cases it isn’t that large buyers don’t want to pay on time, the fact is many are still employing cumbersome paper-based processes in Accounts Payable which hinder their ability to pay to terms. This is beginning to change as buyers are realising that not only can they stabilise their supply chain, but they can also capture cost savings and efficiencies themselves through electronic invoicing.
Automating the Payables process through e-Invoicing ensures transparency and optimisation, and helps to reduce internal processing costs from €17.60 to €6.70 (Billentis, 2010) – a 62% saving per invoice processed. Suppliers are able to track invoice progress automatically, and also benefit from reduced costs and predictable payment timing.
An automated e-Invoicing process also ensures invoices are approved early allowing buyers to either leverage their own working capital and offer dynamic early payment discounts to the majority of their supply chain, or by partnering with banks in Supply Chain Finance programs where the bank can offer a lower cost of borrowing to suppliers (as all supply risk is mitigated).
At a time where many large corporates are looking at ways to gain cost savings, improve processes and ensure a stable supply chain – I would suggest that e-Invoicing can help capture all three.