By Steve Bagshaw
At the end of last month the new business secretary Lord Mandelson announced government payment terms to SMEs would reduce to 10 days. Sounds good. Some public sector buyers were keen to point out this already happens. Others claimed it wouldn’t be practical to achieve this ambitious target. Either way it is a really good idea.
As we report in the current issue, some firms are in fact moving in the opposite direction: using the economic downturn to increase payment terms. So it is refreshing to see the public sector take the lead and help small firms – those at greatest risk of going bust and adding to said economic woes.
It is encouraging news but it also presents an opportunity to get something in return. Vendors will save money by reducing their borrowing if they receive early payment. It will be reasonable therefore to propose a discount in return for invoices paid quickly. We help your liquidity if you support our profitability.
Of course public sector bodies don’t make profits as such, but they do have savings targets to meet.
And for private sector companies this approach would help prevent the potential irony of forcing vendors out of business. If the suppliers we worry so much about going bust do so while waiting for their cash flow to receive a boost from an overdue payment, we only have ourselves to blame. So why not do it?
Step forward those companies – with Tesco chief among them – who have (despite claims to the contrary) made things worse for their vendors by extending terms. What a shot in the arm they could all provide their suppliers and the economy as a whole by expediting bills. Surely the practicalities can’t be beyond them. If they can get asparagus from Zambia to Dunstable in 36 hours, then they can speed up their own accounts payable.
Following the liquidity/profitability approach, they could also secure greater savings in the process.
And imagine the good PR.