How to avoid the late payments naughty list

By Kyriba April 28, 2015

I recently read an interesting article about the UK’s upcoming regulation that will require all quoted companies and limited liability partnerships (LLPs) to publish information about their payment practices1, both on their own websites as well as a central government-run portal. This isn’t the first time that governments either in the UK or the U.S. have intervened to try and speed up payments, as I discussed a few months ago.

While this will certainly prove to be a tricky logistical task for each organization’s finance team to collate all the available data, the possibility of companies losing potential business as a result of their dirty payments laundry being aired could be very damaging. Although there are some organizations, for example Diageo2, who are open about their lengthy payment terms (and have the buying clout that suppliers can’t do much about them), for many companies, relationships with their supply chain need to be positive for both parties.

One of the biggest perceived challenges for companies to stay off this “naughty list” is that speeding up payments is often viewed as a zero sum game. Either the payment is slower and the seller has to extend its DSO and reduce working capital, or the buyer needs to lower its DPO, therefore reducing its own working capital. However, with the evolution and increased adoption of dynamic discounting and other supply chain finance programs, such as reverse factoring, speeding up payments can be a win-win solution. In fact, when looking at third-party funded reverse factoring solutions, it can be a win-win-win situation.

In the case of dynamic discounting, an extension to traditional 2/10 net 30 programs, the buyer and seller agree on a sliding scale discount until the payment due date, which gives the buyer more flexibility in when it wants to / is able to make the payment, while continuing to incentivize them to make the payment early, and reduce the sellers’ DSO.

For reverse factoring, the third party makes an early payment to the seller at a discount that is based on the buyer’s credit rating, not the seller’s, therefore providing more favorable terms for the seller than they can often receive though a factoring company. In this scenario, the seller receives early payment with a minimal discount, the bank has a source of high-quality, low-risk short term investments, and the seller is able to maintain its own DPO, thereby improving its cash conversion cycle.

In conclusion, avoiding a black mark on the payment list needn’t necessarily cause an unnecessary burden for buyers. In fact, it could be a great opportunity for them to implement some best practices which can benefit the entire supply chain.

Further reading

Looking for a win-win solution to overcome the late payments challenge

Supply chain finance, and how spreadsheets can doom the supplier-vendor relationship 

Leveraging an Effective Working Capital Strategy to Reduce the Cash Conversion Cycle

Obama’s SupplierPay initiative – why it’s not just for small businesses


1The Rules: Pay late? Be Publicly Shamed – Financial Director, April 27, 2015

2Diageo ‘threatens backbone of economy’ by squeezing suppliers – Daily Telegraph, January 26, 2015

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