In the third of our series of interviews with David Walker of Cashflow Rescue we talked to him about standing up to supply chain bullies.
From his work with small businesses in debt recovery David has plenty of experience of supply chain bullying.
Read on to learn what he has to say.
PPD: In your experience what are the underlying issues that lead to late payment?
DW: I think, unfortunately, there is a culture of paying late and there is a knock-on effect throughout the supply chain. This is then compounded by the fact that suppliers are very reluctant to take any positive action to speed up payments due to the fear of losing future business
PPD: How important is due diligence in reducing the impact of supply chain bullying and late payment?
DW: It is certainly important to have an awareness of what is going on, but any information is only useful if you act on it.
The press is always full of stories about supply-chain bullies but you never hear of supplier refusing to supply them!
Late payment and supply chain bullying are both issues that individuals and small businesses can stand up to if they are prepared to. Bullies don’t bully everyone – only those with whom they know they can get away with it!
PPD: What are your views on preferred supplier lists, so called “pay to stay”
DW: Personally, I don’t like “pay to stay” arrangements. They seem to be just another way of the client cutting margins and putting an ever increasing squeeze on their suppliers.
However, if this is what you have to do to be a preferred supplier, the choice is yours. But, make sure you are fully aware of what you are getting into. Know what your margins are and what profits you are making.
If you’re not making a profit, then you’re better off not working with the supplier.
PPD: What strategies can existing suppliers use to guard against “pay to stay”?
DW: The best thing you can do is to give yourself a choice of clients / customers to supply to. I appreciate that this is difficult when some businesses are so reliant on a particular supplier, but you always have a choice.
Also, the more of a commodity you are, the easier it is to replace you, so make yourself indispensable to the customer.
Think about what you can do to change your business, the products or services you supply, or the customers you supply to. Just because you have always done business this way it doesn’t mean you have continue doing business this way in the future.
PPD: What would you say is the most effective argument a small business can adopt when faced with a customer that asks for a discount in return for paying on time?
DW: If you are going to agree to a discount, it should be agreed up front, not when the invoice is overdue. Also, I would make it conditional on payment being early – not on time.
If a client asks for a discount when the payment is already late, then you always have the option to say “no”. If you’re worried about future work, that’s quite understandable, but do you want to carry on working for clients like this?
As I have said before, give yourself options and you will be in a much stronger negotiating position. However, if you’re cash flow is so desperate that you need to agree a discount do so, but make it according to strict conditions. I.e., X% off if you pay within the next 3 days. If not, the full amount becomes due.
PPD: Many larger organisations have 60 or 90 day payment terms while almost all small businesses operating on 30 day payment terms; what would you say is the most effective way for small businesses to get agreement for 30 day payment terms?
DW: When you enter into the agreement with the customer, discuss payment terms. Find out what it would take to be paid in 30 days. They will be paying their staff monthly, so why can’t they pay you monthly?
When you have agreed what needs to be done, do it! It sounds obvious, but so many people I speak to complain about being paid late but when I look at the problem they have invoiced late, missed a purchase order number off an invoice, they have sent it to the wrong person, they haven’t included time sheets, or anything else that needs to be done.
If the customer really won’t pay any earlier, make sure you invoice on time and budget accordingly.
PPD: Any final thoughts?
DW: Late payment and supply chain bullying is always a sensitive subject. However, in my experience there is always far more a small business can do to improve their situation.
Waiting for legislation changes or a change in culture is a waste of time.
All small businesses should take a careful look at what they are doing. They should give themselves as many options as possible and make themselves as indispensable as possible to their customers and clients. This gives them negotiating power and then they can reduce the impact of late payment on their business.
Also, all business should have a 13 week cash flow forecast so they know what money is coming in and what is going out. Then there are no surprises.
If you know you have to wait 90 days for payment and you have agreed to this, you can budget accordingly. Sometimes, setting out cash flow forecast on a spreadsheet is just the wake up call they need.
Now, don’t get me wrong, I love working with small businesses and I’m 100% supportive of them, but in most cases, they’re not doing nearly enough to help themselves. This needs to change first, and then we might see some changes in the late payment culture in the country.
David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights. David set up Cashflow Rescue as a low cost legal alternative for small businesses with debt recovery problems.