Why late payment is crippling the supply chain – and how to fix it!
Friday, 13 Feb 2015
Undoubtedly, late payment is crippling the supply chain and destroying growth. Are these large buyers just uncaring – or are they simply unaware of the long term damage they are doing to themselves and those around them?
Head of UK E-invoicing Centre of Excellence
To answer this question three things should be understood:
- Large buyers have cash in the bank and usually sit on this to stay risk free
- Most of these large companies have spent time automating their Accounts Payable to remove inefficiencies and create a streamlined payment process
- Suppliers need to get smarter in how they invoice their customers in order to assist with automation
So, why the late payment?
Quite often the issue lies with the procurement culture found in larger global companies – one that almost borders on criminal neglect and outright bullying towards suppliers – who are not seen as equals. The offending buyers believe that they, the customer, are always right and can therefore force the supplier to do whatever they dictate.
Alongside this, the outsourcing of supplier relationships and the automation process itself also hasn’t helped. The buyer has become separated from the supplier and in some case lost total control of their own supply chain by handing it over to someone else to manage.
But let’s not place all the blame on the buyer. One reason could be down to the supplier not sending good quality invoices (paper & PDF) in the first place – therefore, slowing down the process and forcing the whole AP automation process.
So, ‘why should I care’ I hear you large buyers ask?
Quite simply, every unhappy supplier, every employee made redundant and every debt outstanding through late payment directly impacts your business. People buy from a brand – something that takes years to build but can be destroyed overnight. Social media, the news and your suppliers are telling the world your brand is stopping economic growth – even forcing people into bankruptcy. This impacts your market value, sales and ultimately your job.
Not only that, you’re directly putting up your cost base as suppliers will increase prices. They will start to look for better customers, better payers, better routes to market and companies not linked to bad press stories. Your brand is no longer linked to the new products offered by suppliers and looked for by consumers or your own business customer.
So, what is the solution?
The answer lies in both the hands of the buyer and suppliers.
Buyers can unlock the capital within their payables, without impacting cash flow, by embracing the opportunities offered by the very automation that is creating some of the issues. Streamlining Accounts Payables gives greater visibility of the costs within the supply chain. It gives the buyer the ability to use their cash to pay suppliers on-time or even early – without impacting their working capital. New options such as supplier self-service payment, early settlement discounting or reverse factoring, all work against an approved invoice.
Suppliers, however, also need to take some of the responsibility. To be approved quickly, suppliers need to send good quality invoices. They need to send the invoice in the format the customer wants – not a PDF or on paper, but as electronic content which won’t get lost, gets approved quicker and ultimately helps strengthen the buyer/supplier relationship.
Once invoices are approved, the customer can get smarter by offering new payment options to different supplier profiles. For example, the micro supplier could be offered instant cash via a virtual credit card payment or the mid-size supplier could be offered a sliding discount for early payment. In both cases the supplier is taking a cut to get hold of their cash quickly.
Other financing examples are bank payment obligations that guarantee invoice payment on delivery of the goods or services as agreed. This enables the supplier to get capital into their business even before the invoice is issued. The benefits to the customer are simplified payment processes, lower prices and happy suppliers – whilst they hold on to their own cash for longer.
A win/win relationship
To unlock cash down the supply chain and enable economic growth the answer is for the supply chain to work together and get smarter. The large company needs to change its culture and offer smarter payment and financing options. In return the supplier need to provide smarter invoice content and deliver goods as agreed. The supply chain can grow stronger and cash start to flow back into the economy. Importantly, the relationship balance is restored between the customer and their suppliers – everyone wins.
Find out more about our Buyer, Supplier and Financing solutions. Visit www.basware.co.uk