Cash Flow Problems and Customer Payment

What do ad agencies, staffing companies, manufacturers, and contract research organizations all have in common? In addition to supplying products and services to Fortune 500 companies, they’re all subject to the same strain caused by one of the latest trends in corporate finance – longer payment terms. More often than not, cash flow problems and extended payment terms go hand and hand.

While supplying large, credit-worthy customers can propel small businesses to great success, these same customers often maintain and leverage an enormous amount of power in negotiations with their smaller suppliers. In addition to price, suppliers are often forced to make concessions to their buyers in the form of longer payment terms.

By collecting cash from customers faster and withholding payment to suppliers longer, large companies are able to increase their own cash positions and redeploy that money for their own benefit (increase dividends, initiate stock buybacks, invest in their supply chain, hire new employees, etc.). Essentially, powerful buyers are utilizing their suppliers as a free form of debt. For example, Proctor & Gamble has moved from 45 day terms to 75 day terms, GlaxoSmithKline is shifting from 60 to 90 day terms, and Mondelez International is extending terms all the way to 120 days.

The strain this inflicts on the supplier is undeniable. Once healthy businesses find themselves with cash flow problems and the inability to pay their own suppliers, take on new orders, pay their employees, and in many cases – keep their doors open.

What can be done?

The business owner that finds him or herself on the wrong end of a one-sided buyer/supplier relationship with little hope to negotiate has a few options. Some of which include:

  • Firing the customer. This of course assumes dropping the customer will not cripple the business’s growth or long-term viability.
  • Growing their own cash reserves. Perhaps the cheapest and most difficult way to solve cash flow problems is to reduce cash outflows. Whether it be cutting costs, delaying payments, or collecting other receivables faster, companies must make difficult decisions in order to conserve cash.
  • Asking their supplier if they offer supply chain finance. Many large buyers are offering to finance their supplier’s working capital through prearranged agreements with 3rd party banks. These rates are typically much lower than what the small business could secure on its own.
  • Consulting a bank. By partnering with a small business lender like The Southern Bank, companies can increase their working capital through a variety of products and services that prevent dangerous cash crunches while continuing to supply their large strategic customers.

If your business is faced with cash flow problems or you’re interested in increasing your cash reserves through bank financing, please contact us today.