Paying suppliers in a timely fashion has been a goal of Finance for centuries, but a more recent practice is for companies to intentionally delay payments. So, which strategy is best? Because of accounts payable automation solutions, this decision doesn’t have to be made by only small and medium-sized companies. Slow payments are prevalent at some of the biggest companies in the world, like Amazon, according to a new report by Bloomberg, which states that in 2014, Amazon’s cash conversion cycle, which measures the lag between when companies have to pay their suppliers and when they get paid by their customers, “was negative 24 days. That means, on average, the company took in cash from customers 24 days before it paid it out to suppliers.” Overall, it took Amazon about 90 days to pay its suppliers last year.
The cash conversion cycle at Macy’s last year was 71 days, and while it was only 12 days at Wal-Mart, that number is expected to rise in the years ahead because of the new payment schedule the company issued in June 2015 that could cause a significant delay in when some of the its suppliers get paid.
Considering the record profits that have been prevalent in recent years, why are these major companies “squeezing” their suppliers who often happen to be smaller? Well, one reason is that, while almost all of them have some sort of automated AP solution in place, most don’t get 100 percent of their invoice data electronically. When a company does the amount of business that Amazon and Macy’s does, if even 20 percent of their invoices are still coming in on paper, it’s going to lead to a lot of manual processing and slower payment times.
However, the bigger reason is more strategy based than a result of pain points in the AP process. Writes Stephanie Strom in her April 2015 New York Times article, "Big Companies Pay Later, Squeezing Their Suppliers":
In the past, extended payment terms often were a signal that a company was experiencing worrisome cash flow problems, but these days big, robust companies are imposing new schedules on suppliers as a business strategy, analysts say.
Delaying payments 90 to 120 days allows large companies to maximize their capital and provides them with more cash flow to put toward other projects. For example, according to one estimate cited in Strom’s piece, “Procter & Gamble’s move to extend its payment terms to 75 days in 2013 has probably added $1 billion so far to its cash flow.”
The delayed-payment strategy is proving controversial, however, as underlined by the fact that Walmart’s aforementioned new payment schedule has caused some of its supplier partners to file legal action against the Arkansas-based retailer for unfairly seeking longer payment terms in supplier contracts.
In our experience, this is a cyclical change that companies have made, and they can make it much easier with robust AP automation in place. When you need more cash flow, you can turn up the length of payment terms. If you are trying to attract the best vendors, you will want to offer better payment terms to those suppliers.
Regardless of your company’s current policy for paying suppliers, now is the time to consider tools to more strategically manage that process. Allowing selective choices rather than implementing broad policy changes with long cycles of decision and/or implementation is in your best interest. To learn more about AP automation and these new strategic options, contact us at info@DataServ.com.