No ‘one size fits all’ approach to payment terms

23 April 2013
In the past few weeks, a number of retailers have come under fire for forcibly requesting incremental discounts on invoices in return for more prompt payment. With UK businesses already facing tough times, practices like these not only exacerbate cash-flow issues for suppliers but also damage relationships and increase supply chain risk. Retailers work with suppliers large and small, from one-man band artisan biscuit makers to huge apparel brands. With such a broad range of suppliers, a blanket approach to payment terms and negotiation can cause significant issues. Whether causing smaller retailers to buckle under the pressure of punishing payment terms or causing larger brands to favour competitors, the risks of ignoring relationships and the background of your supplier base can be significant. Relationships between buyers and suppliers are of paramount importance in securing the best prices, terms and product offers. As such, specific approaches are required to ensure payment terms don't create the kind of pressure that can cause smaller suppliers to collapse or cause larger brands to turn to rivals, or even direct channels. While many companies like to keep their cards close to their chest, a collaborative and transparent relationship between suppliers and buyers is key to securing discounts and favourable terms. Using purchasing power to bully suppliers can only damage relationships and reputations in the long term. This can increase hostility to future negotiations and perhaps place the business lower down the pecking order when it comes to exclusive deals, which can be highly lucrative to retailers. Heavy-handed and indiscriminate approaches to payment terms can often come as a result of poor communication between finance and procurement. For the finance department it’s important that the reductions are achieved, so a consistent approach can seem the simplest way to achieve that. But supplier relationships may not be high on their list of considerations. Procurement often holds the knowledge that could help determine whether the terms are appropriate or if better deals could be achieved with a personalised approach. Retailers need to look to the knowledge they have internally and take a measured approach to supplier negotiation. While incentives for prompt repayment can be an effective tool, a ‘one size fits all approach’ can do more harm than good. ☛ Andrew Jesse is vice president at Basware UK
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