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Supplier payment terms – morality tale or legislative imperative?

suppliers_editLast year during a high profile legal process, the former chairman of a publicly-listed retailer openly confessed that the company had pushed out supplier payments as an embedded pillar of ‘business as usual’. Not only was he not contrite nor apologetic about the practice, he extolled the virtues of such an approach as a sound and operationally legitimate way of reducing capital tied up in inventory to be deployed elsewhere for aggressive growth.

Clearly he did not have any issues with forcing suppliers struggling to make profits from paper-thin margins to fund his stock beyond rebates, promotional funds, buy price and logistics contributions to capital funding of the stock itself with the increased anxiety of no assurance on payment dates. Worse still, he wore it as a badge of honour as a ‘hard ass’ retail professional. As a consequence, one of the impacts this had on the business concerned was that it over-ordered stock it simply couldn’t clear through its system, leading to a spectacular failure and massive losses.

Let’s face it, while this practice may be technically legal, it is nevertheless immoral.

In Europe it is outlawed. Supplier terms across the EU are fixed at 30 days and must be paid on the due day under penalty of interest payments, recovery costs and in extreme cases further litigation and heavy fines by law. A law many prominent retail leaders in Australia privately agree is a good one.

Too many retailers use the threat of de-ranging as a blunt instrument to gain maximum advantage in a highly one-sided order process masquerading as a ‘negotiation.’ It is time pressure was brought to bear with government to legislate for fixed payment terms that require all businesses to pay strictly to 30 days or face penalty interest based on a formula of current Reserve Bank cash rate plus five per cent annualised interest.

With that simple move, all financial management practices would be forced from the board of directors down to comply to one simple premise: ‘If we don’t have the confidence to pay for the stock within 30 days, we don’t order it.’ Within a very short space of time, governance of such a principle would ensure retail businesses do not dig bigger holes for themselves than fit the natural rhythm of the model and insolvency would be a much easier process to deal with.

All businesses – not just retail – develop practices that ‘test the envelope’. They push to extremities to achieve profit growth. Sometimes these embedded practices need to be undone through legislation. As one CFO confided to me, “If (legislated payment terms) were the law, we would obey it. But our job is to produce the best profit outcome we can for our shareholders within the letter of the law. If our competitors are doing something and it is legal, so will we. Every dollar of profit counts and we are remunerated based on performance.”

Time to make something which is morally right – and for which a legal precedent exists – the law. If you want someone to fund your business, talk to investors and banks. But don’t exploit the very lifeblood of your business as an expedient solution for accelerated growth that you may or may not be able to sustain. One way or another, it will fail and a firm set of rules will actually be to everyone’s advantage despite the initial reaction of vested interests.

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