News that food giant 2 Sisters has been seeking more than four months to pay its bills, is but the latest in a growing line of companies that apparently see supplier credit as a free source of Working Capital…
Given that the interest-free credit period given by suppliers was originally intended to help a customer to bridge the gap between receipt of the goods and payment by its customers, then payment should be related to this time-frame.
How about replacing the 'Prompt' Payment Code with a Fair Payment Code?
In the fast-moving UK grocery & food industries, with daily deliveries and average supplier credit-periods of 30-45 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods in the industry.
Moreover, government belief that the Prompt Payment Code (i.e. compliance with negotiated terms) fixes the problem, is a misconception.
A supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.
If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper or customer. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?
In practice this means that fresh produce delivered daily to retailers, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system? Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.
Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis away from free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...
However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.
Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.
What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster. This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.
A real Christmas present for suppliers everywhere?
Given that the interest-free credit period given by suppliers was originally intended to help a customer to bridge the gap between receipt of the goods and payment by its customers, then payment should be related to this time-frame.
How about replacing the 'Prompt' Payment Code with a Fair Payment Code?
In the fast-moving UK grocery & food industries, with daily deliveries and average supplier credit-periods of 30-45 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods in the industry.
Moreover, government belief that the Prompt Payment Code (i.e. compliance with negotiated terms) fixes the problem, is a misconception.
A supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.
If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper or customer. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?
In practice this means that fresh produce delivered daily to retailers, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system? Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.
Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis away from free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...
However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.
Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.
What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster. This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.
A real Christmas present for suppliers everywhere?
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