Why don’t Companies pay their suppliers on time?

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[When you read the article title, did you feel some sort of connection? Well, read on. This is a guest article by Alok Kejriwal, founder of Games2Win]

Can you postpone paying your telephone or electricity bills by a couple of months by sweet talking your Utility providers? Would you continue working for a company that paid your salaries after you had to wait outside the accountant’s office for hours? Would you ask your kids to tell their school that their fees will be paid by their parents ‘soon’ ?

If the above sound ridiculous, why is it that Companies routinely pay their suppliers late?

The basics:

Assume that you walked into a Café and ordered a Cappuccino. Once you have finished, you would either settle your bill by cash, credit or debit card. That means that the money almost immediately transfers from your account to that of the Café operator. If this café is a profitable business, at the end of the month, everyone associated with the business should be paid.  On the outside, credit should be a month long. Ok, make it two months max.

What really happens:

Payments that are made without delay are Rents, Utilities and Salaries so that the business is kept alive.

Payments that are made with some procrastination are to suppliers, packaging guys, etc. The attitude is ‘where will they go’, or if not X then Y is always available to sell to us.

Payments that need begging and groveling to be paid are to advertising and media agencies, event agencies, travel agents, etc.  The simple rule here is that even if I don’t pay these helpless folks, my business will simply go on.

Some deeper reasons for ‘late’ to ‘never coming’ Payments

The business model of the buyer is inherently broken:

Examine Companies that pay really late and you will see a business that actually is losing money. Accountants tricks (the results they declare in the newspapers) aside, there is a gap in ‘cash in’ and ‘cash out’. This is the reason why a ‘Ponzi’ scheme is used (pay Peter of yesterday from Tom’s money of today). Sahara airlines, was an epitome of this model. 20-30% of their seats were given away as gifts to Govt. Officials or friends and family that were never paid for! Beware of such Companies. Many ‘reputed’ companies execute media campaigns in the hope of selling a new product. If that offering fails (remember the launch and failure of ‘Cease Fire’- the fire extinguisher brand), there is an immediate gap in cash flow.

Don’t be happy when someone buys something from you. Be convinced that they make money from what you gave them and hence will be able to pay you eventually!

The business is cash break even but not profitable.

Simply said, the Company is not able to afford anything beyond day-to-day expenses. So, if a new office is bought and refurbished or large investments are made in say machines and equipment, then suppliers actually are punished to pay for it. From an accountant’s view, the company cannot cover its depreciation and amortization (write off) costs. Lots of the old textile firms, manufacturing businesses, etc. are in this circuit.

Inherent fraud in the business.

If you examine the case of Subhiksha, its inconceivable how hundreds of crores left the balance sheet over a few weeks. All this after  astute investors like ICICI Ventures and Azim Premji had just invested in the Company and done a deep diligence.

If the promoters are taking money off the table, the business will sputter and choke and you will be left holding cheques with invisible ink on them.

It’s a very long-term gestation play.

Some businesses like Telecom, Power, and Infrastructure are in ‘investment’ mode for years. It takes 10 years to build a dam. In that process, with no cash flow, all the payments come from Capital that is always heavily controlled. Suppliers of the Mumbai Sea Link waited for years to be paid.

It’s just an attitude!

Some Companies believe that they should pay late because suppliers are meant to be paid late. They feel ‘guilty’ if they pay vendors on time. Once I asked a CFO of a 200 crore Company how they prioritized payments – he said ‘depends on who calls us most often and which parties make people sit in our offices. Usually we wait for a legal notice to pay out large amounts’.

If you are selling something to somebody, make sure that:

Every claim of yours is documented and signed.

A reputed media Company recently did not pay one of our firms – Media2win despite us having fulfilled all our obligations. Our paper work was perfect. We filed a ‘winding up’ petition in the Mumbai High Court against them and recovered our money in less than 18 months! So, in such cases, going to court does work. It doesn’t take 20 years.

Don’t be embarrassed to badger debtors for your money! It’s not a favor they are doing you.

Believe it or not, I know folks who have hired ‘follow up’ staff, whose job is to land up in their buyers offices in the morning , sit on the sofas, keep badgering the accountant folks for money and go home at the end of the day to repeat the same process next morning. If you deal with the government, you can hire ‘brokers’ to do this for you. But in India, if you aren’t after someone to pay you, they never will!

Factor in interest and more importantly the ‘cost of mental agony’ of dealing with a company in the price you sell to them.

It is my estimate from having been working for 20 years now that suppliers to really troublesome Companies charge them almost 25% higher costs than they would charge to normal customers. In the world of business, everything is costed for. Just add the ‘pain %’  in, and you will be way more relaxed when payments get delayed since you are getting extra money for the pain!

A long-term proposition is to have a ‘payment rating’ index that ranks and rates companies on their payment ‘hygiene’ like Crisil does for Companies’ credit worthiness or Moody’s does for a country’s sovereign risk status. This will create a supplier reputation index to help vendors decide if they want to supply to a Company or not. Obviously badly ranked companies will improve on payments to move up the ranks.

Sounds gloomy? Every cloud has a silver lining. For years we did business with Nestle Delhi. I remember my office boy telling me ‘ Sir, each month I know it’s the 7^th coz that’s when the Nestle Cheque arrives without fail.’

[Reproduced from author’s post. Follow Alok on Pluggd.in]