Late Payers and Cash Flow

Late payment is increasing among big businesses. The effect of this on the cash flow of small suppliers is potentially catastrophic.

Big Business and Late Payments

Operating cash-flow comes from core trading activity. This is the cash needed to finance trading and to service borrowings. How well the average SME can come up with enough of it though depends on how well it can collect its own cash from customers.

In recent years however, big businesses have increasingly strong armed their SME suppliers to agree to extended payment terms. Two such are Heinz which pays its bills 90 days after the end of the month in which goods and services have been invoiced and brewery giant AB InBev  which takes 120 days. 

Late Payer - Heinz

Because all Figurewizard sample forecasts are all working examples it is possible to select "edit" and make your own changes to cash collection ratios to understand how changes can dramatically depreciate liquidity and cash flows. What follows are examples of that.

Cash colletion ratios for the sample forecasts displayed in the Figurewizard website are set at 10% for month 1 - cash collected during the same month invoices were issued: 70% for month 2  - cash collected 30 days after the month of invoicing and 20% for month 3 - cash collected 60 days after the month of invoicing.

Now assume that a new customer such as Heinz, who pay 90 days after the end of the month of delivery (month 4) will be representing either 0%, 10% or 20% of total sales respectively. The forecast cash collection ratios now change as follows: 

  Heinz @ 0%    of Sales Heinz @ 10%  of Sales Heinz @ 20%  of Sales
Month 1 10% 10% 10%
Month 2 70% 60% 50%
Month 3 20% 20% 20%
Month 4 0% 10% 20%

By selecting "edit forecasts" then "cash collection" and successively applying these new collection ratios -  Operating cash flow, the bank account, and the bank plus undrawn financing facilities will change as follows: 

  Heinz @ 0%    of Sales Heinz @  10%   of Sales Heinz @  20%   of Sales
Operating Cash Flow 12,208 -6,923 -26,055
Bank @ Year End -35,439 -56.766 -78,139
Bank plus Undrawn Financing 14,561 -6,766 -28,139

Note that when a business bank account plus undrawn financing returns a negative, balance that will represent the amounts of extra cash the business will have to find to avoid cash-flow insolvently. Mofre debt though can only be a temporary measure.

Late Payer - AB InBev 

In the case of AB InBev  in the UK the policy is not to pay their bills until 120 days after the month of delivery (month 5). The changes to Figurewizard sample forecast's percentages for cash collection including AB Inv at 10% and 20% respectively of total sales now become.

  AB InBev  @ 0%   of Sales AB InBev  @ 10%  of Sales AB InBev  @ 20%  of Sales
Month 1 10% 10% 10%
Month 2 70% 60% 50%
Month 3 20% 20% 20%
Month 4 0% 0% 0%
Month 5 0% 10% 20%

Unsurprisingly the effect of these changes to cash flow, the bank and financing are even worse than those for Heinz.

  AB InBev  @0%   of Sales AB InBev  @ 10%  of Sales AB InBev  @ 20%  of Sales
Operating Cash Flow 12.208 -15,123 -42,453
Bank @ Year End -35,439 -69,965 -96,537
Bank plus Undrawn Financing 14,561 -15,965 -46,537

All of these values were all calculated simply by editing the entries for monthly cash collection percentages for the online working example. Visitors are free to edit all examples to view the effects of that on all of the sample forecasts. The Interactive What-If Calculator is also well worth a look.

Supply Chain Finance

Many large companies imposing disgraceful payment terms such as these on their SME suppliers offer a supply chain finance facility through a third party provider, ostensibly to mitigate the damage they would otherwise suffer.

This however is not the panacea that it seems at first sight. The biggest problem is that there is often a service / arrangement charge or fee attached which will reduce operating profit. That in turn reduces operating cash flow, therefore limiting an SME's perceived ability to service new financing needed for investment. It may even eradicate the possibility of obtaining such new finance altogether.

Small Businesses Need Protection

Both Heinz and AB InBev  claim that late payment was as a result of “mutual agreement.”

It is of course nothing of the kind. It results from threatening small suppliers with the loss of business and possible bankruptcy as a result - The lack of effective government action against practices like these is tantamount to tolerating a bully's charter for UK business, especially SME suppliers.

To view and learn more about how Figurewizard would calculate your operating cash flows and the bank, follow the links to the working examples below.

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