Pay Your Valued Suppliers – They aren’t Creditors

I recently tweeted about the alarming trend of larger companies delaying payments – longer and longer – to smaller companies (article here: on.wsj.com/N6Zfjb).  It’s something that has been continuing to nag at me: large companies (like those on the S&P) have record cash holdings, yet are increasing the number of days they are taking to pay suppliers (yes, that means you APPL). They are basically using their large size to stiff-arm the smaller suppliers; becoming the school-yard bullies we all despised.

Oh yea, little company – what are you going to DO about it?!? Nothing! We’re the big company, we have the money and deals, and you WILL accept our terms!” The unstated (or often, sadly, stated) implication: there’s a line of suppliers lined up behind you to step in and take your place. Worse, the CFO organization within these large companies often views this “tactic” of delayed payments as “best practice.”

Well, guess what? Your practices suck, and while they may improve your cashflow in the short-run, they are actually damaging your business in the long-run. In fact, I could write an entire post (and probably will!) about the importance of moving to fewer suppliers, and treating them as valued partners…  but here’s the short version:

By bullying your suppliers, and pushing them hard on prices and payment; what you’re really doing is pissing them off, lowering their profit (which is a bad thing, as it means they aren’t able to put their best resources to the task), and incentivising them to deliver lower quality overall. They begrudgingly work with you – and from an attitude like this, you don’t get loyalty, innovation, and amazing customer service. You get the bare minimum.

I recently had two experiences where customers paid me – *ahead* of time. Yes, they paid my invoices faster than the terms in the contract. Imagine that.

The first, a long-time customer I really love, have consistently paid their invoices within a week of receiving them. I sent a note of thanks to their manager, expressing true gratitude for their promptness. She sent me back, in return, the following great statement:

“My motto is: when you have cash in the bank, pay valued partners ASAP!  Glad to be appreciated :)”

Now, in my book, that’s class. Thanks Robin, our hat’s off to you! The second recent occurrence was from a brand new customer. Now, if you’ve had a small or medium sized business yourself, you *know* how important it is to you to get that first invoice paid from a new customer. Our new customer pays straight away (awesome!), and I shoot off a message of heartfelt “Thanks!” With a nod and a wink, Patrick replies the following:

“You’re welcome. We try to pay everything as soon as possible. Its clear we don’t have a working capital manager yet :)”

With a clear dose of sarcasm towards the “Best Practice” of using your suppliers as creditors, Patrick acknowledged the beauty of treating suppliers who do a good job as true partners. Bravo!

So why does this change? We all know it’s wrong, and we avoid the practice as small and mid-sized firms. Why is it, as firms grow, we begin to lose this sense of valuing those external partners we work with? And really, shouldn’t we be doing the opposite? The clear answer is yes, we should.

So if you’re reading this, go and do it. Walk right into your purchasing office, or supplier management department, or whatever it is, and change the policy, starting tomorrow. You’ll find that you spur more loyalty, increased service levels, and greater long term value by doing so. These qualities will easily offset the minor cashflow position.