Late payments. Is it a serious problem for running business in MENA region ? How to deal with it? Is it better outside the region?

It’s the new normal: big companies are paying their bills late, later, and latest.

Everyone knew that when it came to days payable outstanding, longer was better.

However, before the recession, many companies were reluctant to embark on payment-term extension programs for fear of disrupting their supply chains, losing suppliers, or forcing them to raise their prices. But in the face of what looked like economic Armageddon, such considerations seemed less compelling than bolstering working capital. Therefore, many large companies began telling suppliers (especially the smaller ones providing noncore or indirect goods and services) that payment schedules would be extended from 30 days to 45 days, or from 60 days to 90 days, and sometimes beyond.

To their surprise, it worked.

According to Veronica Heald, Hackett group director and practice leader at REL Consultancy, which focuses on working capital, those big companies experienced “not nearly as much pushback from suppliers as they expected.”

During the financial crisis, she explains, small businesses, losing revenue, were afraid to challenge their big customers, and so bit the bullet and accepted whatever payment terms were offered. Today, big businesses are sitting on mountains of cash, and delaying payments as long as possible has become, as Heald says, “the new normal. Lots of organizations survived the downturn by getting smarter. They went through cost-cutting; improved working capital, and saw the benefits of extending payables.” Today, she says, extending payables is a best practice, and a good way to grow cash mountain.

Not coincidentally, according to a 2012 Experian/Moody’s Small Business Credit Index study, severe delinquencies (invoices more than 90 days past due) climbed 11% in the first three quarters of 2011. And as a 2012 National Federation of Independent Business report says, purchasers “want to extend payment as long as possible. . . . This is one area where large firms often take advantage of their market power to strong-arm small-business suppliers and customers.”

“The practices of the downturn have turned into business as usual,” says Larry Marion, chief executive officer of Triangle Publishing Services, which produces reports, white papers, and custom publications for midsize and Fortune 500 businesses. “Just last week,” Marion says, “a customer of many years who had been paying on a 30-day schedule tried to change the contractual language for all new projects to 60 days.

“That same week,” he continues, “I noticed a 30-day payment had not shown up. I contacted the accounts-payable department and they said that’s scheduled for 45 days. I said, ‘No, I have an agreement.’ They said 45 days was their policy.”

What did Marion do? In the first case, he told his client that his quote was based on 30 days, not 60, and if it had to be 60, he’d have to increase his quote by 10%. “It went back to 30 days,” he says.

In the latter case, he circumvented accounts payable, spoke directly with his client, and told him he’d like to bill him earlier. “Instead of getting paid when we finish,” Marion proposed, “I’ll bill you when we’re halfway finished to recover from the 45 days.” The client accepted Marion’s terms.

Heald applauds Marion’s gumption. “Don’t accept the customer’s terms as a foregone conclusion,” she advises. “When companies embark on payment-term pushback programs, they’re expecting resistance. Sometimes, if the supplier complains, they’ll just put [it] back on the old program. I’ve seen this from huge, huge corporations. They don’t have the desire to manage negotiations. They’re just hoping 80% or so of their suppliers will accept it without complaint.”

Heald and Marion have the following seven strategic suggestions for how small businesses can resist extended payment terms and negotiate with their larger customers.

1. Respect yourself. “You might be small, but you may be providing a unique value that can’t be replaced,” says Heald. “Know your competitive advantage with respect to other suppliers. Do you have a longstanding, successful relationship with the buyer? Are you cheaper? Maybe the buyer has nowhere else to go. Feel good about yourself.” Don’t assume you’re at your customer’s mercy.
2. Know yourself. Small businesses, Heald says, should know whether they’re a part of their buyer’s direct or indirect spend. If what you do directly affects your customer’s business, you have more leverage in negotiations. If what you provide is a commodity (paper clips, coffee cups, chairs), “you’re more at risk. In either case, you should know your competition,” she says.
3. Work the price. Heald suggests that a cash-flow-challenged business can offer early payment discounts. If, for example, your buyer wants to extend payments from 30 days to 60 days, you could offer a 2% cut in price if the buyer pays in 20 days. Marion is less than enthusiastic about that strategy. “I’m not that desperate to take that 2% haircut to get paid faster,” he says. On the other hand, if you’re a service provider, Marion suggests creating multiple, billable milestones. “Typically, the person you’re negotiating with has a budget for the project,” he says. “How it’s divided up is not his concern. If he’s got $50,000 for a project, he doesn’t care if it’s paid out in three or four stages, $20,000/$15,000/$15,000 or $20,000 and then three payments of $10,000. Manipulate something that matters to you, not to them.”
4. Avoid your customer’s accounts-payable department. “I would want to go to the procurement and buying organization, not the finance organization,” Heald says. “Finance wants to improve working capital; it sees all sellers as the same. Procurement will understand you better.” And, says Marion, “Focus on your client. Realize that AP and your client have very different interests. AP is incentivized to improve cash-flow metrics. That’s all. Your client, you have a relationship with. Let him worry about AP.”
5. Let accountants talk to accountants. When a business is telling you it’s planning to pay you late, that can wreak havoc with business and your mental equilibrium. To get emotion out of it, Marion suggests having someone else deal with collectibles. “If you have an accountant or bookkeeper, have [him] make the call to AP,” he says. “An accountant speaking to another accountant, they speak the same language.”
6. Know the history of the relationship. Heald emphasizes that it’s important to know how your customer has been paying you. “If you’re on a 30-day program and the buyer has been paying after 60 days, and now it wants to move you to 60 days, well, it doesn’t really have much of an impact on your business. Or, you could say, ‘You already have been paying me extremely late.’” There’s no harm, says Heald, in trying to “shame” your customer.
7. Suggest financing. In cases where getting paid late puts your business in a bind, and your customer is not willing to negotiate, Heald suggests asking if your customer is willing to enter into a supply-chain-financing agreement. In this process, your send your invoice (say it’s for $100) to a bank-managed portal. The bank immediately pays you $98 for the $100 invoice, no waiting. Your customer pays the bank $100 in 30 (or 45 or 60) days. Heald believes this arrangement will grow in popularity in coming years as everyone (the small-business supplier that gets paid quickly; the bank that collects a fee; and the buyer that pays at a working capital–friendly pace) can benefit.

There are electronic procurement platforms, such as Ariba’s, that allow for automated dynamic discounting, in which a supplier can say, “If you pay me on day 10, take a 2% discount; if you pay me on day 20, no discount; and if you pay me on day 30, the price rises.” But this requires the technology to get on the platform or others like it. If that’s not feasible, Heald strongly urges small-business people to “pursue every avenue” to resist extended payment terms “without being overly aggressive. Think strategically. Ask yourself how you can connect with someone who’s willing to compromise; who’s willing to work something out.”

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