UK: Argos Terms change could mean supplier sales increase of 8% to restore cash margin

The Forum of Private Business (FPB) has attacked Argos for doubling the time it takes to pay suppliers. The catalogue chain’s suppliers are being forced to wait up to 60 days for invoices to be settled - compared with the previous limit of 30 days. The Home Retail owned chain has also said it will knock up to 4% off bills it pays within the new longer time limit.
This means a supplier could need an 8% increase in sales to restore its cash margin.
See why below.

Financial impact on Supplier:
1. Price discount of 4%, all costs remaining constant: Extra sales required
• On annual sales to the customer of £150k, the supplier currently makes a gross profit of 40% i.e.£60k on ex factory cost of £90k.
• Reducing prices by 4% means that sales to the customer are reduced to £144.0k, and assuming that ex factory cost remains at £90k, the new gross profit is £54.0k i.e.37.5% of sales.
• Then, New Sales x 0.375 = £60k
• Therefore, New Sales = £60k/0.375 = £160.0k
i.e. extra sales of 6.7% to restore supplier's cash margin

2. Cost of giving the customer 60 days credit
• Here the supplier is effectively giving the customer an interest free loan = 60 days sales
• On sales of £150k to the customer, a 60-day customer pays the supplier 365/60 times per year, i.e. 6.08 times per year.
• This means that the supplier is lending the customer £24.67k, interest free, permanently.
• Say the cost of borrowing is 10%, then the supplier is effectively borrowing £24.67k @ 10% i.e. £2.47k to give it to the customer, interest free.
• However, taking previous credit to the customer of 30 days, then 60 days represents an additional 30 days credit.
• Using the above calculation, this means that on 30 days extra @ 10% cost of money, the supplier is effectively giving the customer a discount of 0.82% on sales of £150k.
• Reducing prices by 0.82% means that sales to the customer are reduced to £148.767k, and assuming that ex factory cost remains at £90k, the new gross profit is £58.767k i.e. 39.50% of sales.
• Then New Sales x 0.3950 = £60k
• Therefore New Sales = £60k/0.3950 = £151.9k, i.e. a sales increase of 1.3% is required to restore supplier's cash margin.

In other words, if the customer asks for 30 days extra credit + a 4% discount off invoice, the supplier needs an 8% increase in sales to the customer, to restore the the supplier's cash margin

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