Given the news that HMV and Blockbuster 'owed £490m' to creditors when they collapsed after Christmas, it is important that suppliers attempt to reduce credit periods in unprecedented times. Calculating and explaining the financial benefits of an appropriate discount for earlier payment therefore becomes a required skill in the NAM role…
S: Given our need for reduced exposure, coupled with your constant requests for lower cost prices, we may be able to help each other out…
B: Agreed, but I don’t see the exposure on your side? We are one of your biggest customers…
S: So was HMV in the home entertainments category, yet they went bust ‘overnight’ leaving suppliers to find incremental sales of £4.9bn to cover losses of £490m!
B: ??
S: Another time…let’s focus on our trade partnership. As you know our annual sales to you are £14m, and you pay us in 45 days net.
B: Those are our standard arrangements for all suppliers
S: Let’s just focus on you and I…. Given the global financial turmoil, our company would feel more comfortable with 25days credit, a reduction of 20 days, and we are prepared to pay to reduce that risk…
B: How much?
S: Great you find it interesting… Let me work you through the calculation…
B: Convince me…
S: At the moment you pay us 365/45 times a year, i.e. 8 times a year, meaning you owe us £1,7m at any time… (i.e. £14m/8 = £1.7m)
B: So?
S: We want you to pay us 365/25 times a year, i.e. 14.6 times a year, meaning you owe us £0.96m at any time…(i.e. £14m/14.6 = £0.96m), a reduction of 20 days
B: We would need a big discount for 20 days…
S: I thought the same, until I worked up the numbers. Let me show you…
B: I have another meeting in five minutes..
S: Won’t take that long. At 45 days you owe us £1.7m, and at 25 days the amount you owe is £0.96m, a difference of £0.74m
B: Like I said, I’m busy…
S: Say the cost of borrowing is 9% interest per year, so the cost of borrowing £0.74m for a year is £0.067m
B: Where is this heading?
S: I am trying to show you how little you need off invoice to beat 9% interest on your money…
B: OK, another minute…
S: That £0.067m represents 0.5% of our annual sales to you i.e. £0.067/ £14.0m x 100 = 0.5%
B: ??
S: In other words, 0.5% off invoice is equivalent to an interest rate of 9% per annum on your money!
Buyer: Run that by me again?
SuperNAM: No problem, and I’ll leave you a couple of slides to talk it through with your finance guys…
Adventures of SuperNAM (17)
S: Given our need for reduced exposure, coupled with your constant requests for lower cost prices, we may be able to help each other out…
B: Agreed, but I don’t see the exposure on your side? We are one of your biggest customers…
S: So was HMV in the home entertainments category, yet they went bust ‘overnight’ leaving suppliers to find incremental sales of £4.9bn to cover losses of £490m!
B: ??
S: Another time…let’s focus on our trade partnership. As you know our annual sales to you are £14m, and you pay us in 45 days net.
B: Those are our standard arrangements for all suppliers
S: Let’s just focus on you and I…. Given the global financial turmoil, our company would feel more comfortable with 25days credit, a reduction of 20 days, and we are prepared to pay to reduce that risk…
B: How much?
S: Great you find it interesting… Let me work you through the calculation…
B: Convince me…
S: At the moment you pay us 365/45 times a year, i.e. 8 times a year, meaning you owe us £1,7m at any time… (i.e. £14m/8 = £1.7m)
B: So?
S: We want you to pay us 365/25 times a year, i.e. 14.6 times a year, meaning you owe us £0.96m at any time…(i.e. £14m/14.6 = £0.96m), a reduction of 20 days
B: We would need a big discount for 20 days…
S: I thought the same, until I worked up the numbers. Let me show you…
B: I have another meeting in five minutes..
S: Won’t take that long. At 45 days you owe us £1.7m, and at 25 days the amount you owe is £0.96m, a difference of £0.74m
B: Like I said, I’m busy…
S: Say the cost of borrowing is 9% interest per year, so the cost of borrowing £0.74m for a year is £0.067m
B: Where is this heading?
S: I am trying to show you how little you need off invoice to beat 9% interest on your money…
B: OK, another minute…
S: That £0.067m represents 0.5% of our annual sales to you i.e. £0.067/ £14.0m x 100 = 0.5%
B: ??
S: In other words, 0.5% off invoice is equivalent to an interest rate of 9% per annum on your money!
Buyer: Run that by me again?
SuperNAM: No problem, and I’ll leave you a couple of slides to talk it through with your finance guys…
Adventures of SuperNAM (17)
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