Will Transparency of Payment Terms Change Corporate Behaviour?

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Would the behaviours of big business change if they were forced to report on how they paid their suppliers? Well we don’t have very long to find out as in 2016 new payment terms regulations comes into force which will require all quoted companies and LLP’s to do exactly that.

Under the new rules, large companies will be required to disclose:

  • payment terms
  • average time taken to pay
  • proportion of invoices paid beyond agreed terms
  • proportion of invoices paid
    • in 30 days or less
    • between 31 to 60 days
    • beyond 60 days
  • any late payment interest owed and paid
  • whether financial incentives are required to join or remain on supplier lists.

Over the last year there have been a number of high profile cases where big business has been accused of taking up the role of classroom bully. Mondelez have been taken to task, as well as Mars, Kellogg, Heinz, InBev and Tesco amongst others and their favourite practices does seem to be the extending of payment terms. Pre-crash 2008 there doesn’t seem to have been too much reporting on the subject and it would appear that while pushing out terms was initially used to ensure continued existence during that rocky period it has since turned into a valuable cash cow at a time of limited growth and diminishing profits. There is also a push to follow the pack, driven by the demands of shareholders and analysts. These businesses are vastly competitive and cannot afford to allow rivals to steal a march; especially one as tangible as this when pushing out terms can offer potentially tens or hundreds of millions of pounds to an organisations cash flow.

I am pretty sure that part of the reason organisations are able to do this is that they are mainly geared up adapt and react to the demands of their consumer. As it stands there is little information that is presented to the consumer that allows them to make an informed choice about whether they buy based on a firm’s payment processes, and as such not much that stops them in following this route.

I can however see this becoming more and more of a customer issue. We have already seen over the last year in the UK that Starbucks has been forced to change tact on corporation tax, based largely on the backlash from consumers. No one would have wanted press like that.

Customers put a large amount of faith in the organisations they choose to buy from and expect a degree of business integrity, ethical and social standards that they may not have considered 10 or 15 years ago. When a company is not deemed to have hit these standards in the eyes of the customer they don’t react well (recent examples such as “horse gate” spring to mind) and given the rise of social media and the transparency of information what may have been one person’s gripe in years gone by may now be a topic of interest to the masses.

This legislation change may well push the payment processes of organisations into the sphere of interest of the consumer. New information will be readily available to an attentive press corps to whom it should be no trouble to report on industry comparisons and the best / worst practices of big business. It is easy to see how one well-placed article might spark curiosity in the subject.

So will behaviours change? Well I have discussed before how focus on such a singular element of the working capital equation as payment terms is probably not effective in the short or long term and hopefully businesses start to agree. I would like to think that this legislation will act as an impetus to change as firms begin to see the negative PR risk from simply extending terms.

Procurement can take a lead in this area, helping to improve overall working capital through a collaborative supplier management approach. Business relationships need not be so one sided and the negative risks associated with them being so will come back to bite in this new world of transparency.

This is a guest post by David Hodge, a procurement consultant with a wide array of experience across numerous industries.  If you’re interested in sharing your knowledge with Procurement Sense readers please contact us.

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David Hodge

I currently work as a procurement consultant for one of the Big 4 accountancy firms having spent 5 years working on a variety of different categories in industry. I have a particular focus on procurement technology as well as the interaction between procurement and finance. Please get in touch if you would like to know more.

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