Vital to give credit where credit is due

Fears over the IT industry's cash cycle have seen credit terms become increasingly constrictive in recent years, writes Eddie Pacey

Back in the old days, the application of credit terms between a raw material supplier and manufacturer, their distributor or wholesaler and, in turn, the reseller and end-user, was designed to cope with the vagary of financing and the sales cycle to minimise the squeeze along the route.

How each in turn coped with the payment of invoices was a self discipline and how the anomaly and variance in terms was financed was pretty much left to each one in turn.

The reason terms were extended at the beginning of the route to market, narrowing at the other end was simply that it took longer for a manufacturer to bring in raw materials, build and sell on finished product and for those in between to balance the term offered to their clients and those imposed on them by their supplier.

Margin yield is much higher at the raw material and manufacturing end, hence the willingness of those in the past to offer terms of up to 90 days or more to distributors. With margin narrowing at distributor and wholesaler, the ability for them to match the extended term has and will always be limited, even accounting for relatively modern day tools of receivables financing.

Put simply, a manufacturer on a margin of 40 per cent or more could easily offer a distributor 90 days to pay and given margin (historically) of between 10-15 per cent, a distributor would offer simple standard 30-day terms. No doubt the wholesaler, operating on a margin of about five per cent and 30-day terms from the distributor would limit their terms to no more than seven to 14 days.

Over the years, a squeeze in margin and improved range of finance offerings beyond traditional overdrafts have added considerable pressure to what was an accepted format of product-to-market strategy. Manufacturers, fearful of margin erosion began to arbitrarily amend terms to distribution, frequently with little warning. This was exacerbated by more detailed term changes, variances in discounts offered and co-op and marketing support. This squeeze cannot be easily replicated down the supply chain.

Distributors and, to a lesser extent, resellers, fearful of losing business, found themselves squeezed still further, paying their suppliers frequently quicker than they were paid themselves, adding a financial cost to an already pressured margin.

Recently, an article touched on the demand received by many suppliers to cycle retailer Halfords. The demand indicated that they now insisted on paying their suppliers in 120 days with no settlement discount applicable. Smaller suppliers, fearful of losing Halfords’ business accepted the inevitable and those who did not respond meekly conceded to the demand.

Halfords was a catalyst prompting other giants in the retail sector to follow suit. The effect has snowballed, giving rise to an ever-increasing demand even in our sector for extended terms from resellers. This has become quite prevalent in the past six months and if there is a genuine concern, it is that these demands are frequently driven by the inability of the channel to adequately manage the cash cycle.

If terms demanded are counter-productive, do not offer them and be prepared to negotiate. More crucially, ensure your debtor is chased for payment adequately and in good time. Cash and its movement is a company’s blood supply; constrict it or fail to stem a wound and it will cause damage and failure. Sensible terms and agreement along with compliance is paramount to business survival.