I was somewhat surprised over the last few quarters as buyers went to their supply base, normally at the request of the Finance Department, to extend standard payment terms from 30 days to 60 days. I was even more surprised at how quickly that request changed from 60 to 90, and eventually 120. So what comes after 120? Frequently, a Chapter 11 filing. But Chapter 11 isn’t always an issue limited to the customer – in a lot of cases, the supplier that accepts these terms will be filing as well.

The problem is, in most industries extended payment terms are unsustainable, at (almost) any price. Add dried up credit markets into the equation, and what you are dealing with is a supply chain recipe for disaster. Of course there are industries where 120 day payment terms are acceptable, or even the norm, but in a standard distribution relationship this is not the case.

Suppliers that are hurting will take on business at extended terms – they need it on the books. But viable suppliers - companies that truly understand their cost of doing business and how cash flow risk affects their bottom line - won’t accept the change. They would rather walk away from business than take the hit to cash flow and profitability. Over the last few months, I have found that the way suppliers respond to these requests have been great indicators of their financial strength.

So what does this mean for your supply chain?

First off, if you need to extend terms with distributors, it probably means your company is having cash flow issues. But in the long run, extending terms is like putting a band-aid on a gaping wound. It’s not going to fix the core problem – your sales dried up and you don’t have the cash to pay the bills.

If it has to be done, there are several approaches you can take, but the worst scenario is when Finance issues a universal mandate – all suppliers must accept 90 day terms. The one size fits all approach is going to put suppliers on the defensive and some will drop you as a customer all together.

Figure out which suppliers have the shortest terms and the highest bottom line impact in terms of spend. Present the request to them as a temporary change – and be sure to put a time limit on it. If they are still reluctant, try to substitute extending terms by using a p-card. The supplier gets paid in a timely fashion and you get another 30 days of cash flow (if you set it up right).

If you are in the position of requesting extended terms and your supplier won’t agree to them (even with a substantial markup of price), there is still reason to be thankful – this supplier will probably still be around next year.
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Joe Payne

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