They say that “fast money makes fast friends,” but paying slow will make you friends in the finance department. As Chief Procurement Officers and their departments become more involved in the cash management strategies and practices of their enterprises, the impact of contracted payment terms comes into greater focus. In 2009 and 2010, many CPOs made this a focus (we’ve provided a few examples, as part of larger articles, on CPO Rising here and here) and in turn, made a positive impact on enterprise cash positions.
Many of the initial stories involved requesting, renegotiating, and occasionally mandating new payment terms for current contracts:
Request: Particularly in the early days of 2009, when we sat at the depths of the current/recent recession, many suppliers, to their credit (both literally and figuratively), were responsive to specific requests from their customers for more lax payment terms. Ask, and ye shall receive.
Mandate: Other buyers were more forceful and rolled out new payment terms with a “my way or the highway” tone.
Negotiate: Still, other groups put the terms on the table with different suppliers and effectively sought to renegotiate the larger contract (occasionally bringing price into the equation).
Each approach found success, but unlike an early payment discount (discussed in our last article), there are trade-offs – this is not free money. This is not a win-win result. Your gain is at a cost to the supplier. That cost may be livable, but it is real. Each supplier has a cost of capital and bears that cost when terms are extended.
It will be interesting to look at the aftermath of this initial payment terms extension trend. Many warned that these actions were not “fair play” and would inevitably increase the number of supplier bankruptcies. That may have been true, but I have not seen or heard, even anecdotally, of such bankruptcies (that doesn’t mean none have happened). If you have any examples, please share them with us here.
I think a more interesting topic will be to look at how behaviors within procurement and finance departments have changed (if, in fact, they have changed) in the establishment and/or negotiation of payment terms on new contracts. Also, how these new initiatives are being tracked and managed today and what the results have been. I’m also interested in learning how sophisticated some of the payment strategies have become – are they segmented in any specific way and do they focus on other aspects beyond payment due date, like milestone tracking for capital or large consulting projects?
Establishing a policy regarding payment terms can be much more than just useful, it can have a real financial impact. But it requires a level of cohesion and visibility across the source-to-settle process and it requires a level of financial understanding to establish the right policy and it requires a mechanism to track and enforce it.
The establishment and management of payment terms and strategies (and cash management, in general) can be very valuable to an enterprise and provides a great reason for procurement and finance to collaborate.
CPOs seeking inroads with the CFO are wise to pursue this discussion with finance. CFOs seeking greater control of and visibility into cash positions (i.e. all of them) are wise to pursue this discussion with procurement.
