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The Great Payment Terms Debate.

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As a business community, what can or should we be doing about the length of payment terms? 

Over the last few months there have been a number of stories to hit the headlines criticising the likes of Diageo, Mars and Mondelez over plans to increase their supplier payment terms.

 

For its part, Diageo was criticised for reportedly telling suppliers that from February 1st it would be increasing its payment terms from 60 to 90 days on all new contracts and tenders. Meanwhile, examples were found by UK newspaper The Daily Telegraph of Mars and Mondelez extending their payment terms up to 120 days.

 

These moves drew the scorn of the UK government as well as business interest groups, such as the Federation of Small Businesses as well as the Forum of Private Business.

 

In fact such was the outrage that the UK government launched a consultation to look at changing the law to allow trade bodies to challenge instances of payment terms they saw as unfair. The consultation is due to run until March.

 

Meanwhile, Procurement Leaders is due to launch a new benchmarking tool over the coming months, which will provide data to members on a number of key metrics, including payment terms, which can enable cross-industry comparison. 

 

In some preliminary findings, taken from a survey of 470 senior executives from a spread of industry sectors from around the world, average payment terms the food and drinks industry was actually found to be far from the worst offender. The average in this sector stands at 53 days, well below the the infrastructure industry (telecommunications and utilities), which stands at 72.

 

In fact, the consumer goods industry was somewhere in the middle of the entire industry spectrum. Healthcare and pharmaceuticals (52 days), manufacturing and engineering (53), public services (60), transport and logistics (48) and technology (51) were all in and around consumer goods.

 

Only energy and raw materials (39) and financial services (45) were found to have significantly lower terms.

 

But neither is the UK the worst offender with average payment terms standing at just over 40. Italy’s average stretches above 110 days, while those in the Netherlands and the US sit above 80 and just below 60 respectively. In Europe, only France, Germany and Sweden have average payment terms lower than the UK.

 

It seems that the consumer goods industry has, perhaps unfairly, taken most of the negative headlines while others have avoided the limelight when in fact there are far worse offenders out there.

 

But it also seems that formal legislation makes little difference in reducing averages. In France the law states that payment is due 30 days after the date on which any products were received or the services provided. Parties cannot agree terms on payment periods which are longer than 45 days after the end of the month or 60 days after the date of invoice. Fines for late payments apply automatically if these terms are breached.

 

Even with this legislation, however, average payment terms in France stand just below 40, well above the legally required limit.

 

Fines and legislation are all well and good but perhaps the tactics that the UK government and others should employ if they really want to get payment terms down and cash flowing throughout the supply chain is to speak about alternatives and educate those that are increasing terms. There needs to be greater awareness of the cost of this kind of behaviour across industries and a serious conversation about mechanisms such as supply chain finance, so that the first thought to address liquidity isn’t to yank the payment terms lever. 

 

This article is a piece of independent writing by a member of Procurement Leaders’ content team.

Tim Burt
Posted by Tim Burt