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Payment terms and getting paid

August 14, 2013

It is interesting that despite record low interest rates and robust stock-turn rates, there is continued pressure to extend the payment period. A couple of years ago, the average was 57 days; now (according to data being assembled by IACCM) it is just over 60.

One possible reason could be the difficulty companies are having in obtaining short-term funds from the banks. However, this does not stand up to examination since the drive is being led by larger corporations, which are sitting on record cash piles.

Another possibility could be that this is a strategic move, designed to take advantage of the lower resistance that suppliers may show because of the low cost of money.

IACCM research will shortly explore this topic in more depth, to discover what is going on.

Meantime, the issue facing suppliers is not only the contracted period for payment, but also the actual time it takes to get paid. An article in CFO magazine suggests that this is not entirely due to poor levels of compliance by customers, but actually has more to do with invoicing errors by suppliers. While this is certainly an explanation, investigations by IACCM suggest that many of those ‘errors’ are due to either unclear or altered processes by customers. For example, many have tortuous internal approval processes which are frequently not understood by the group that placed the order. Another common ‘trick’ is to change the invoicing address, but not alert suppliers to that change until they chase for payment.

The issues with getting paid seem to be more pronounced in companies that have outsourced their accounts payable, which raises questions over how much they know or control the behavior of their outsourced provider.

Getting paid is fundamental to doing business. Customers that value supplier loyalty should focus on the fairness and integrity of this key process and contract term.

  1. It’s a continuation of the finance department’s drive to become purchasing management. Payment terms should rightly be part of the price negotiation process and, if finance wants the suppliers to be banks they should understand that they will pay for this service in increased prices.

  2. Join me at my IACCM ATE international trade finance webinar tomorrow Thursday 22nd August

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