Cash is king, but extended supplier payments could spell trouble

Cash is king, but extended supplier payments could spell trouble

Food manufacturers are catching some flack for extending payment terms to their suppliers. The growing tension in the supply chain points to the pressure manufacturers are themselves facing in the current trading environment - and their need to free up cash flow in the balance sheet. But, in a charged political atmosphere, manufacturers should tread carefully, Katy Askew suggests.

Supplier payments have become a regular news feature in recent months. From Premier Foods plc to 2 Sisters Food Group and Mondelez International, large companies are facing criticism over how and when they pay suppliers.

Premier was accused of implementing a "pay to stay" scheme when it asked suppliers to "invest for growth". Reports at the end of December suggested 2 Sisters was seeking more than four months to pay its bills. Meanwhile, this week Mondelez, Mars Inc and Greencore were accused of requiring 21 days to pay some suppliers.

On the whole, manufacturers have insisted they are working closely with their suppliers. The implication appears to be that the negotiation of payment terms is part of a broader collaborative approach to supporting growth in the industry.

Premier amended the way it negotiates with suppliers in the face of the public backlash but insisted that the mechanism was "misunderstood and misinterpreted". The company stressed: "The most important aspect for us is that we continue to develop strategic supplier partnerships that are focused on delivering mutual growth."

Meanwhile, Mondelez said it is extending longer payment terms to some "larger suppliers" within the "relevant UK legal parameters". For its part, Mars echoed the sentiment that not all suppliers are given the same terms. "We are not imposing new payment terms on all suppliers. Mars will always work with each of our suppliers individually."

The delay in payment for goods and services already provided can hit smaller suppliers particularly hard. According to the Federation of Small Businesses, recent research suggests almost one in five small businesses had been subject to some form of "poor payment tactics".

However, the move to change payment terms can also be seen as a reflection of just how tough the going is for larger CPG companies in the current trading environment, where sales are under pressure. Less money coming in coupled with higher operating expenses means cash flow management is increasingly important.

As one finance professional explains: "Larger companies are now proposing 90-day terms, which will give them a short-term gain in cash flow. Despite interest levels being poor it is always good to boost your cash figure on the balance sheet."

Companies need strong cash flow metrics in order to invest in growth. So, in some respects, the discussion around 'collaborating' or 'investing' for mutual benefit is more than hyperbole. Smaller suppliers really do rely on the financial success of their customers. 

Nevertheless, this is becoming a high-risk strategy. In the increasingly charged atmosphere of pre-election UK debate, the issue has - unsurprisingly - becoming politicised.

At the start of January, a UK government-backed plan requiring companies to reveal how long it takes to pay suppliers every three months was revealed. Last week, a cross-party parliamentary group was established to tackle the issue of supplier payments. MP Debbie Abrahams, who hosted the group, said poor payment practices were "as unethical as tax evasion".

"It's simply a case of big businesses using smaller businesses as a credit line by applying bullying tactics that are unfair and have the knock-on effect of stifling growth in the economy," she insisted.

As the practice of balance sheet engineering through extended payment terms becomes more widespread - and gains more traction as an issue in the public eye - the possibility of regulatory intervention becomes more prominent.