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Imposing 90 day payment terms on small suppliers is bad CSR

By 10th June 2017 Blog, CSR One Comment

Making small companies wait 90 days to get paid is a classic example of bad CSR.

BIG companies often impose extended payment terms on their suppliers, it’s nothing new.

According to research from Bibby Financial Services in 2015, just over half of SMEs in the UK have had to wait more than 30 days for a payment, with the worst off waiting 100 days.

Payment delays cause two main problems for SME businesses: firstly, they result in poor cash flow, putting smaller companies in danger of not being able to pay their people and suppliers. And, secondly, they cause smaller businesses to spend too much time chasing debts when they could and should be focussed on improving customer service levels and pursuing growth.

It’s bad enough when any big business acts to deliberately starve its supply chain of cash for 90 days at time. But when it’s a big business with a supposedly big commitment to CSR too, it risks endangering faith in responsible business and undermining public trust.

Extended payment terms – the price of doing business?

It almost seems as though the acceptance of very generous payment terms has become the price of doing business with large companies.

That might be OK for SMEs at the top end of the range, but it’s too high a price for smaller companies and will act as a barrier for many of them.

Why should SMEs have to pay this price? If they’re supplying quality products and services at competitive prices, surely that should be enough to get them over the line?

SMEs as lenders

The trend for imposing longer payment cycles accelerated after the financial crisis of 2008.

With banks eager to stockpile cash, they turned off the taps and reduced lending to businesses – even the global corporates weren’t able to access credit in the same way.

The solution? Turn suppliers into lenders by extending payment terms.

In 2013 Procter & Gamble introduced a 75-day payment period for suppliers, and added an estimated $1 billion to its cash flow, according to a report in the New York Times.

That’s fine if, like other lenders, suppliers earn interest on the loans they make by offering credit payment terms but they don’t: they just get paid late for the goods and services they supply, which technically increases their costs and squeezes margins.

A taxing problem

Another impact of imposing extended payment terms, particularly on smaller suppliers, is the impact on VAT which can be two-fold.

On the one hand, SMEs that use the cash accounting method only pay VAT on sales when they get paid, which extends the cycle and means there’s a delay in getting business taxes into the coffers of the Exchequer to spend on the public good.

On the other, those SMEs that use the annual accounting scheme and simply pay VAT on a quarterly basis pay tax based on the date their invoices are raised – which means they end up forking -out on VAT before they’ve received any money from their customers. For example, imagine a company that records a taxable sale of £1,000 + VAT at the end of May. It will be expected to pay VAT on that sale at the end of July, but on 90 day terms won’t receive payment of its invoice until the end of August, putting an additional strain on cash flow.

Prompt payment is good CSR

Paying suppliers in full, on time – and without making them wait unreasonably – is a real example of CSR done well.

It’s the socially responsible thing to do because it enables small suppliers that are employers to pay their people on time so those people can afford to live.

It’s the socially responsible thing to do to help those small employers stay afloat so that they can keep their people in gainful employment rather than claiming out-of-work benefits.

It’s the socially responsible thing to do because the employees of those small businesses will spend money in their local economy and because research shows those small companies are much more likely to buy from other small companies locally too, passing on the benefits even further into their communities.

And it’s the socially responsible thing to do because it puts business taxes in the hands of the Treasury sooner, making more money available to fund schools and hospitals etc.

But best of all there’s a direct business benefit to paying promptly rather than imposing extended 90 day terms – your smaller suppliers will feel more valued and therefore prepared to go even further for you in other ways, finding new ways to add value.

Making small companies unfairly wait 90 days to get paid is a classic example of bad CSR. Don’t do it.

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