Once again, extending payment terms is making headlines. While recently reading the New York Times, I came across an article on big companies extending pay terms, often putting the squeeze on their suppliers.
Extending payment terms is nothing new, and will undoubtedly remain common practice in our modern business environment. However, there appears to be an even greater issue at the heart of this discussion. The problem is not necessarily payment terms extension, but rather an overall lack of communication and collaboration between buyers and suppliers on mutually beneficial business strategies.
As the article points out, companies such as Mars, Kellogg, Proctor & Gamble and others are trying to maximize their capital via payment terms extension in order to pursue any number of business objectives. However, such term extensions can often have an inverse effect on the needs of their suppliers.
Suppliers need access to capital to sustain – much less grow – their operations. Extending payment terms without offering other options for suppliers is a short-sighted strategy with limited benefits to anyone.
So, how can buyers and suppliers move towards a mutually beneficial strategy that focuses on the health and long-term growth of both entities?
Some innovative companies for example are embracing multiple and collaborative win-win cash flow practices of dynamic discounting and Supply Chain Financing (SCF) while extending DPO or pursuing net terms. However, without a business Network, scalability is challenging and companies will not be able to work more closely together and efficiently in order to realize significant working capital improvements.
For any naysayers, there are substantial benefits of utilizing a business Network:
- Early payment discounts of $1+ million per $1 billion in targeted spend for buyers
- Payment in as little as 3 days for suppliers
- Significant return on short term cash deployed for early payment
- Better forecasting for buyers and suppliers
In a global economy, collaboration and expanding partnerships is critical. Pursuing near-term goals at the detriment of longer-term growth and sustainability is not the most strategic course of action.
Numerous working capital strategies, technical innovations, and ever more efficient processes exist today. As companies are planning their next course of action, one also should not forget about the suppliers. They are critical partners in your success, and the long-term growth of your company will ultimately depend on these relationships.
Collaborations such as these are a win-win…and that’s a focal point of the Networked Economy!