Cash flow is always important to any business. But when times get a bit tight, suddenly cash flow comes into sharp focus and executives start asking how to improve it. We are in an era where companies everywhere are holding cash to pay tariffs, systems are changing as digital transformations accelerate, and everyone is trying to figure out which “soft skills” keep us from being replaced by AI. Among all that noise, an article in Supply Chain Dive caught my eye: Bridging the payment gap: Why suppliers are taking control. Based on SAP Taulia’s supplier survey of 10,854 suppliers in 129 countries, late payments increased from 51% to 55%, and only 37% of suppliers are being paid on time (42% last year). So today let’s talk about supplier cash flow from a procurement perspective. Tight supplier cash flow always means opportunity for procurement professionals to strengthen supplier relationships, improve processes, and even drive savings. However, we have to drive those targets sustainably for our suppliers.
Early Payment Terms
If your company is reasonably stable for cash flow, one great opportunity to improve supplier cash flow is to offer early payment terms. This means your standard payment term is maybe 45, 60 or even 90 days, but your supplier offers you a discount of 0.5-2% to pay invoices within 10 or 15 days. In most ERP/accounting systems a 1% discount for paying in 10 days and otherwise full payment is due in 45 days looks like: 1%10Net45. Note most payment terms are considered to be in calendar days, not business days (i.e. the counting includes weekends and holidays). Sometimes the “early payment” term is considered to be business days while the net payment is calendar days. That means a 10-day early payment term really means two weeks for the buyer and the 45 days means about six weeks. Those couple of days very rarely matter, but it’s worth noting they are sometimes measured differently in practical terms.
When I’ve worked for companies with a stable cash flow, I have always been a big fan of early payment terms. It’s like an additional savings that doesn’t affect salesperson commissions, drives accountability in the accounts payable team, and helps suppliers keep cash moving. I currently have a client who offers an early payment discount, which I definitely prefer to waiting 45 days for payment. It does add a little uncertainty to when I will receive payment because I’m never quite sure if they will pay early and take advantage of the discount or wait the 45 days to pay invoices. Note that if you do add this option for suppliers, you may also be adding uncertainty to the relationship without realizing it.
If you are evaluating supplier bids and/or running an e-auction, you may need to use a bid transformation to compare pricing for different suppliers. If one supplier is offering a 1% early payment discount, you should include that in the auction because it has value to the buyer. For more on calculating the value of different payment terms, see my longer article on payment terms. This is where the modern approach to e-auctions of capturing the full value of supplier offerings instead of simply price is very important to running a sustainable e-auction program.
Third-party Payment Management
One of the cash flow options I didn’t know about when I started in procurement was using a third party to pay suppliers. This means another business (typically a bank) handles payments to suppliers, bills the buying company regularly, and often offers a rebate to the buying company of 1-3% in exchange for managing this cash flow. (Scotiabank has a program like this.) Programs like this require some implementation as they usually integrate with ERP systems, do require that a buying company have reasonable cash flow to cover one larger payment monthly to the third party, and need someone who can run the numbers on costs vs. benefits. That being said, they can be a good option and can be a win for all parties involved.
Third-party payment programs are especially good for managing excessive tail spend, as they can consolidate payments to multiple suppliers. The really sophisticated procurement move would be to get your purchasing cards (T&E cards, p-cards, etc.) through the same bank as the third-party program and get the supplier to consider all spend in calculating the final rebate. Especially when talking about millions in spend, a tenth of a percent based on spend matters.
Side note: Third-party payment management or purchasing card rebates are a shockingly good category for an e-auction. Instead of running a reverse auction for fees or something similar, run a forward auction for the percentage rebate and put your estimated spend in the “quantity” column. It takes a little supplier training to run this correctly, and I HIGHLY recommend running a full RFP before running the e-auction, but this is a way to drive your rebate percentages up. For example for $1,000,000 in spend and a rebate of 1.25%, the quantity in the e-auction is 1,000,000 and then suppliers would enter 0.0125. The resulting number competed in e-auction would be the total rebate amount suppliers are offering.
Payment Processes
Another way to help suppliers improve cash flow is simply to work on accounting processes. This one is very tricky because it’s extremely rare that the procurement team has any jurisdiction over the accounting team. If this is one of your goals and you’re lucky, the procurement team and accounting teams might both report to the CFO. That being said, it’s extremely important that the procurement and accounts payable teams have a good relationship. A strong relationship between these teams helps spot supplier invoice errors, improves supplier partners, and increases procurement team understanding of company finances.
If you are looking into your accounting processes, start with executive buy-in. If the accounts payable and procurement teams do not report to the same executive leader, make sure those executive leaders agree there should be more cooperation between the teams before embarking on any kind of process improvement. Next, determine what your on-time supplier payment metrics look like. Are you in the average noted by the SAP Taulia’s survey with late payments around 55% and fully on-time payments around 37%? Hopefully your business is better than that, but most procurement teams have no idea of their suppliers’ late payment percentage. Even if you’re beating the average, start tracing root causes for late payments. Keep in mind the Pareto Principle always applies – likely 80% of your late payments come from only 20% of your total payments. Focus on your highest value or most frequent late payments first and start figuring out root causes. Some questions to ask:
- Are certain suppliers sending invoices in a way your character recognition programs can’t read?
- Are there typos in supplier information that need to be fixed manually?
- Do you need automation to cover a gap in labor or skill levels?
- Are payments being rejected or delayed due to a mismatch between PO and invoice?
- Are you missing early payment discounts frequently enough to justify adding headcount to the accounting team?
Tread a little carefully when working with other teams, but there is also a TON of value in having a great relationship between the procurement and accounting teams. It’s extremely difficult to run a good bid and keep good relationships with suppliers when those same suppliers aren’t being paid on time.
Being a Customer of Choice
During the 2021 supply chain crisis, many companies suddenly learned what it really meant to be a “customer of choice.” In short, being a customer of choice means you are easy to work with, run clean bids with good scopes of work, and make payments on time. If you don’t know if you are a customer of choice to your key suppliers, it’s important to find out. I know MANY companies who think they are easy to work with and a great customer, but if I talk to their suppliers I learn they are an absolute pain. A buyer with extreme quality requirements, competitive price negotiation, and even excessive bureaucracy can be a customer of choice if their suppliers understand why. Perhaps the buying company’s industry has extremely strict regulations or small profit margins. Perhaps the buying company is going through a rough business period due to leadership changes, geopolitical pressures, or other uncertainty (above and beyond what the entire industry is facing). Similar to an e-auction program needing to focus on conveying supplier benefits and clearly communicating internally the need for increased procurement negotiation, suppliers will automatically consider a customer to be difficult if they don’t understand why the company does certain things. Communicating things clearly and working on internal processes can make you a better customer to your suppliers. And better customers get priority for scarce resources, better customer services, and sometimes lower pricing.
Anywhere you can make life easier for suppliers, try to do so. Pay them on time. Communicate the “why” behind company processes and be open to changing them where possible. Listen to suppliers when they say your procurement/accounting/technical teams are difficult or easy to work with. While there is always pressure to improve cash flow and hold funds, driving key suppliers out of business helps no one. Use the levers of early payment terms, third-party payment management, improving payment processes, and being a customer of choice to drive value for your business, your customers, and your suppliers.
If you would like to talk about your suppliers’ cash flow, let’s chat. If you’d like to get these articles weekly straight to your inbox and never miss one, sign up for my newsletter.
My book, Transform Procurement: The Value of E-auctions is now available in ebook, paperback and even hardcover format: https://www.amazon.com/dp/B0F79T6F25
