I wonder if this will resonate with you: recently, a client* failed to pay me on time. No reason given, no communication – just no payment when it was due.
I know it wasn’t because they were unhappy with my work – they were a new client with a smallish, clearly-scoped piece of work, so I’d offered them a pricing structure where they simply paid whatever they thought the work was worth. The amount invoiced was the amount they’d already agreed was fair.
I can also be pretty sure that it wasn’t a simple oversight – I send a gentle reminder to all clients whose invoices remain unpaid a few days before the due date (a practice I heartily recommend, by the way).
They had just decided that the contract they had expressly agreed with me could be unilaterally ignored.
Now, I know I’m far from unique in this experience – and that’s really my point. Late payment of contractors and suppliers is so prevalent that, annoying though it is to be on the wrong end, we’ve almost come to expect it – yet it’s also one of the stupidest, most self-defeating and most short-sighted things any business can do to themselves from a commercial perspective.
the cash-flow context
Leaving aside, for now, times when a business fails to pay due to genuine mistake or a disputed invoice, the biggest reason a business has for failing to pay an invoice on time will almost certainly be cash-flow. In some cases this will just be driven by the general idea that it’s important to maximise creditor days over debtor days; in others it will be a genuine cash-flow difficulty – the business is waiting to be paid before it can pay its suppliers.
In both scenarios the benefits of withholding payment are outweighed by the downsides of doing that.
Maximising how long you take to pay your suppliers and minimising how long your customers take to pay you can be achieved legitimately – you just need to negotiate payment terms that do that, and then stick to them. There is no need to pay late. Indeed, doing so artificially skews creditor days versus debtor days as a metric for investors, as that metric is (amongst other things) meant to show how strong your bargaining position is, not how good you are at reneging on your bargains.
Admittedly, it’s a bit more complicated in the cases where the money to pay suppliers just isn’t there. In those cases the main fear is that word will get round that the business is struggling financially, lines of credit will dry up, and whispers of doom will become a self-fulfilling prophecy. Maybe. But I would still argue that simply staying schtum and failing to pay is a worse approach.
The vast majority of suppliers will accept a credible, pro-active explanation of why payment will be late, and when it can actually be expected instead. If you reach out to your suppliers in advance of the payment due date and explain, in a believable way, that the money will be there but it’s just been delayed until a different, specified date, they know where they stand, they can liaise accordingly with their own suppliers and credit providers, and will be far less likely to suspect that your financial end is nigh – or, even if they do suspect that, it still makes more sense for them to see if you meet your revised payment date before taking any drastic action. This is especially true where you already have a good relationship with suppliers (and, funnily enough, the best way to achieve that is to have a good track record of timely payment on previous occasions).
On the other hand, if you keep quiet and wait to be chased, you’ve created a whole bunch of aggravated suppliers with nothing to counter their suspicions that your business is teetering on the brink of insolvency, and with the motivation to do something about it. Do that often enough, with enough suppliers, and it’s just a matter of time before your lines of credit dry up, the litigation starts, and before you know it you’ve ended up in the insolvency scenario you were trying to avoid in the first place.
mistakes and disputes
Turning briefly back to the cases of mistake and disputed invoices: the odd one-off mistake is forgivable and unlikely to have too much impact, especially if you’re quick to acknowledge it, apologise, and fix it by making payment straight away (rather than waiting for your next payment run and then paying by BACS instead of CHAPS – for any non-UK readers, BACS is slow, CHAPS is fast). On the other hand, if you’re constantly paying late due to mistake, this has the same effect on suppliers as deliberate late payment, and will still lead to all the bad effects described below – it also indicates that you have a systemic problem, maybe extending beyond your finance function, that needs urgent and serious attention.
As for disputed invoices, the answer here is to dispute early – by doing so, you make it more likely that any necessary evidence is fresh in the mind and readily available, and you also maximise your chances of resolving the dispute before the payment due date – this is important, because if you turn out to be wrong, you could still be liable for the supplier’s late payment remedies, so it’s best to avoid that uncertainty by resolving the dispute before late payment becomes a complicating factor.
why you should pay on time
So, having hopefully dispelled the myth that there is any real justification for paying late, let’s now look at the very real justifications for paying on time – in the form of avoiding the bad consequences of late payment set out below.
#1 – squeezing your own credit
If you pay late, suppliers will eventually respond by shortening your payment terms, maybe even to the point of requiring payment up-front. This obviously has a material negative impact on your ability to do business, let alone grow. Yes, you might be able to get around the problem by switching to suppliers which you haven’t screwed over yet, but see consequence #2 below on that subject. You also might have the bargaining power to stop suppliers doing this to you, but see consequence #3 below – plus, if you’re really so big that you can consistently get away with this, you might well run into different (and bigger) problems in the form of competition law and abuse of a dominant market position.
#2 – disrupting your supply chain
If you pay late, eventually suppliers will refuse to do business with you (or they may shorten your payment terms so much that you have to switch suppliers). They (or their own suppliers) may even go bust. That has three main consequences:
Presumably you chose your supplier because they offered something you wanted – better quality, prices, responsiveness, or whatever else; by losing that supplier, you lose that benefit. This obviously matters less when what you’re buying in is commoditised, with a supplier-heavy market, but even then there can still be a small loss of benefit which, when added up across your supply chain, can amount to a real detriment.
#3 – no more favours
We’ve all been in situations where we need a bit of a favour from a supplier – a rush-job, a little something extra in the scope that we forgot, giving you some input for a pitch or bid. If you pay me late, then guess what? My appetite to help you out quickly evaporates. Even if your business represents a lot of my income, at the moment you come to me, cap-in-hand, needing a bit of a favour, I know I’ve got you over a barrel – oh, and by the way, I’m already looking to diversify my income away from you, so your days of being able to push me around are numbered and I’m almost looking forward to the day you come to me asking for another favour and I can say, “No”. Ain’t karma a b!tch?
#4 – loss of competition
Competition in your supply chain is self-evidently a good thing – it helps to drive better value and better quality (and also means you have alternative options if something goes wrong with your first-choice supplier). If, by paying late, you drive your suppliers (or their own suppliers) to insolvency or reduce the number of suppliers willing to do business with you, you undermine competition in your supply chain, and all the benefits that go with it.
#5 – reducing your legal options
If you fail to pay on time, you’re most likely in breach of contract. Without wanting to get too technical on the reasons why, if you then need to enforce that contract yourself, against your supplier (for example, because your contract says they must supply you exclusively, and they’ve started supplying your competitor), your own breach of contract means that you might well not be able to. Whoops.
#6 – the moral imperative
Finally, breaching your agreed payment terms is just wrong. Maybe you’re OK with that, but it might help to look at it with the shoe on the other foot – if you paid up-front, expecting me to deliver you a contract draft (that you need in order to win a big opportunity) by a specified date, and I simply fail to deliver on time, with no communication, even when you chase me, how would you feel? Maybe you’re still OK with that, on the basis that so long as you’re not the one on the wrong side of the equation, life is good – fine, but be aware that people talk, and if you get the reputation for being… well, a bit of a b@stard business, the world can soon become a trickier place to win contracts and turn a profit.
I don’t know a single business whose strategic plan involves actively messing up their cash-flow, constantly dealing with supply chain disruptions, having no contingency or wriggle-room, seeking poorer value and lower quality, or not being able to enforce contracts.
Conversely, any sensible business, regardless of its more specific strategic goals, will be seeking good credit terms, a stable and positive supply chain, options for when things go wrong, better value and quality and a robust legal position.
If you want those good things for your business, then the lessons are simple:
The cost:benefit analysis of doing anything else simply doesn’t stack up.
And the best part? Because so many businesses still haven’t woken up to these simple lessons, you’ve got the chance to differentiate yourself and gain a competitive edge by embracing them.
Successful businesses pay on time.
©2018 Candid Commercial Limited
*No, I won’t name the client – they know who they are and, besides, I have a confidentiality agreement with them and, unlike them, I honour my contractual commitments. (How’s that for passive-aggressive?!)