503-785-3485
bill@conerlyconsulting.com
  • Facebook
  • Twitter
  • Linkedin
Conerly Consulting Conerly Consulting
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Home
  • Business Strategy
  • Your Vendors and Your Payment Terms in Economic Recovery

Business Strategy

07 Apr 2010

Your Vendors and Your Payment Terms in Economic Recovery

  • By Bill Conerly
  • In Business Strategy, Economy

As the economy improves, some businesses will find their working capital is tight. (See this working capital article, this article about Caterpillar, and the classic Business Strategy for the Economic Recovery.)  As orders come in, raw materials may need to be purchased, new workers hired, deferred maintenance performed, etc. Many of these bills must be paid immediately, even if the customer won't pay for 60 days.  This article is addressed to large companies buying at least some of their stuff from small companies.

The large corporations are the tightest, it seems, on payment terms.  They often wait 60 days or more to pay vendors.  In the case of supermarket chains, they often don't pay until long after the merchandise has been sold to consumers.  It's simply a way of saying to vendors, "If you want me to sell your product, make me an interest-free loan."

I understand working capital management, but many of these corporations don't understand.  Let's look at some numbers.  A large corporation with good credit can float 60 day commercial paper for 0.24%, less than one quarter of one percent.  Small companies with bank lines are often borrowing at prime plus two, which today is 5.25%.  Many small businesses, though, are going to finance companies to factor receivables, or even using the owner's credit card.  So 5.25% is pretty conservative as a borrowing cost for small business.

What's worse for small business is that many of them are constrained and cannot get all the credit they need.  They are holding back on their growth because they don't have the working capital they need.  Their banks are super-cautious, because conservative bank examiners are looking over shoulders.  But's let's stick with the small businesses actually borrowing at 5.25%.

Let's say that the small business sells the large corporation $100,000 of widgets.  Instead of paying in 10 days, the corporation demands 60 day terms.  OK, that extra 50 days save the corporation $30.  (50/365 times 0.24% times $100,000).  What does it cost the small business to let the payment wait an extra 50 days?  $719.  (50/365 times 5.25 times $100,000).  So the big fish saves $30, costing the small fish $719.

Here's a better tactic for the big fish: get a reputation for paying quickly, but ask for a discount.  If the large corporation gets a price discount of one-half of one percent, it saves $500.  It's additional interest expense of $30 is more than outweighed by the price discount.  The small business?  It's cheaper to give up $500 in price than $719 in interest.

Far too often corporations remove the payment decision from the purchasing manager.  The CFO tells the AP department to slow payments.  Instead, the benefit of slow payment should be noted on the purchasing department's ledger, so they can manage price and terms to reduce total costs.

Small business owner, what should you do when faced with a slow-paying large customer?  When you figure out what price you should ask for, calculate your interest cost on the receivable.  When the sales rep asks for a price discount, tell him you've already given a substantial discount in terms.  Tell him your cost of credit and work through the example.

For those small businesses really constrained by lack of working capital, don't take orders from slow payers.  Tell them sorry, you need to work with the fast-payers in order to grow your business.  Instead of prioritizing customers by price or order size, when you are constrained by capital you should prioritize by payment promptness.

  • Share:
Bill Conerly

Search

Sign Up For Our Newsletter!

View Latest Issue

RSS Bill’s Forbes Articles

  • Inflation Has Not Shown Up Yet, But It’s Coming February 25, 2021
    Inflation is muted, but not for long. Inflation is coming in the next two years, then will be followed by a boom/bust business cycle, or maybe two.

Testimonials

Bill’s presentation was neatly balanced…rich with content.. and our audience really enjoyed his humor.
Bing Sheldon, SERA Architects
The ratings you received from our banker evaluations were among the highest I’ve seen, which matched my impressions exactly. Your presentation style is quite engaging, you bring interesting and valuable content, and our ability to interact in a stimulating way during “Q&A” sessions makes you a valuable addition to any meeting agenda. As a bonus, you are a genuinely enjoyable participant in conference activities beyond your presentation.
Steve Yeakel, Montana Independent Bankers
Bill Conerly is one of the most interesting and engaging speakers I have ever heard. The fact that he is a very funny man is a bonus.
James A. Kronenberg, Oregon Medical Association
Dr. Conerly’s presentation and view of the economic conditions impacting the world of business is insightful and thought-provoking. His analysis and presentation style is audience focused and engaging, leading to the efficient development of follow-up activities by those in attendance.
Paul Ulrich, The Inteplast Group (plastic bags)
Your presentation was right on the mark. I received more positive comments about you than any other presenter. We would not hesitate to recommend you to others or have you back for an encore performance.
Bob Russell, Oregon Trucking Association
Every time you spoke, we got business.
Chris Rasmussen, Washington Trust Bank, Bank of the Northwest
As you know, it can be difficult to find economists who provide good substantive information who are so entertaining and engaging. I received many enthusiastic comments from members and others in attendance. I was very pleased with Dr. Conerly and have recommended him to NCSTAE, our national organization.
Molly Steckel, Idaho Telecom Alliance
Our audience of local business and community leaders not only valued the economic data you provided, but they really appreciated that you made it applicable to their businesses, their personal lives and moreover – that you presented it in a clear and entertaining manner.
Scott Boyer, Mountain Pacific Bank
Bill did a great job! There were many in the audience who liked him and many in the audience who loved him! Bill shared pertinent and timely information with our audience of commercial real estate professionals and added interesting stories and a funny sense of humor twist.
Jana Knoll, BOMA Boise
Dr. Bill Conerly opened our Ace Hardware Platinum Retailer Conference by helping our independent small business owners understand the current state of the economy in a straight forward and humorous manner that connected very well with the retailers I spoke with. Dr. Conerly provided information our retailers can use to lead their businesses. He connected with the audience and made a complicated topic understandable.
Mike Berschauer, Ace Hardware Corp

Get in touch

(503) 785-3485

bill@conerlyconsulting.com

PO Box 2188
Lake Oswego, OR 97035

Useful Links

  • Consulting
  • Speaking
  • Videos
  • Blog
  • Press
  • Contact

Social Links

  • Facebook
  • Twitter
  • Linkedin

Newsletters

Copyright 2020 Conerly Consulting LLC