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Payment terms

April 18, 2018

Payment always feature high in the list of most negotiated terms. The last ten years have seen a steady lengthening of the time it takes to get paid. Recent data showed an average of 57 days, but it is often much longer. Big corporations are creative in the way they measure their compliance with payment terms, with many only starting to count after the invoice has been ‘approved’ – an activity that can add weeks to the cycle.

IACCM research has identified that prompt payment is the number one factor in achieving ‘preferred customer’ status. Paul Humbert recently wrote an excellent article suggesting that this should be a key performance metric, commenting: “There is however at least one purely objective and important metric which is rarely measured; namely, PROMPT PAYMENT of accounts payable. Many organizations routinely fail to pay vendors on time in accordance with the terms of the contract. Why? A lack of priority? An attempt to capture “float”, essentially getting an interest free loan from the vendor? Aside from breaching the contract, failing to pay vendors on time causes serious damage to the relationship. Imagine if someone’s paycheck was delayed by days or even months?”

Business practices cause regulation

Delays in payment are especially damaging for small businesses, which are typically highly reliant on cash flow. Many large organizations remain wedded to a view that ‘might is right’, seeing no problem in using their power to exercise unreasonable – indeed in this case unethical – behavior. It is that inability to make moral judgments that drives the need for regulation.

But morality aside, is it really in a company’s best economic interests to punish its suppliers? What is the cost associated with delayed payment – the administrative cost, the supplier performance cost, the reputation cost? Over time, these costs certainly outweigh any benefit.

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