Trade & Supply Chain

Payments and collections – the folly of late payment

Published: Nov 2020

In this article we look at the impact of COVID-19 on Asian trade flows, consider the impact on suppliers when their customers delay paying them, offer some suggestions for preserving cash flow in these challenging times and explore how supply chain finance is evolving.

Alarm clock disintergrating

Regional trade-flows disrupted by COVID-19

These are uncertain times for companies all over Asia. Across the region, supply chains have been disrupted by the COVID-19 pandemic, forcing production facilities to scale back operations. Many countries imposed export controls at the start of the pandemic, and some of these remain in place.

Ongoing disruption in the global aviation and shipping industries has compounded the situation, and some products which were formerly much in demand have seen their markets disrupted, as consumers, and national governments, have focused on securing essentials. A rise in regional geopolitical tensions has also had a dampening effect on trade, and now there is increasing nervousness about the global impact of a “second wave” of the virus.

Are companies hoarding cash?

COVID-19 is testing the resolve of even the most efficient companies, including those which habitually pay their suppliers on time. Companies are doing whatever it takes to preserve liquidity. Unfortunately, delaying payments to suppliers is a route that some companies have opted to take. They will have looked at their supplier lists and made some internal ranking decisions about which relationships are the most important – ie those suppliers which must be paid on time, and those which can wait.

Jarrod Shandley, Co-Head of Product at RapidRatings in Brisbane says: “We have not seen significant signs of cash hoarding since COVID-19. In the prior four quarters, company cash balances on average went up 6.2% per quarter, while in the quarter following COVID-19 we saw an average cash balance increase of 9.0%. This is certainly an increase, but we also know that many companies raised capital or drew down debt during the quarter, so these numbers are as expected. In fact, many of our clients with global supply chains have been accelerating payments to suppliers to keep their operations flowing”.

Prompt payment is a differentiator in business

The best-managed companies understand the negative consequences of paying suppliers late and know that prompt payment of suppliers can be a very useful differentiator in business. It can be used as a tool which provides considerable leverage, for example to motivate suppliers to improve their performance. Suppliers are far more likely to want to do more business with prompt payers than with those who have a history of doing the opposite.

Singapore-based Leon Scott, MD, Regional Head Asia Pacific Japan and Middle East at TradeIX notes: “We have certainly seen examples of companies using COVID-19 as an excuse to delay payment, even when cash is available. Equally, and admirably, there are many examples of companies exploring every way possible to speed up payments to suppliers, even if it requires using their own balance sheet to do so. Some of the most vulnerable are the most critical, and sensible companies know this”.

The impact of late payments

Late payments to suppliers really are the scourge of the supply chain and cause more disruption and damage to supplier/customer relationships than any other single risk factor. Below are some of the effects:

Stress in the supply chain – when a customer delays payment to a supplier, there is an immediate impact on that supplier, who will have a cash flow shortfall that needs to be covered. When a supplier is under pressure to meet its financial obligations, there can be a ripple effect through the whole supply chain – ie downstream providers of goods and services may well feel the impact of the customer’s action too.

Damage to supplier relationships – delayed payments cause tensions in the supplier/customer relationship. They also make the supplier less likely to want to continue future business dealings. It is vital in these situations that both parties maintain dialogue. The track record between the two parties is key here, as is honesty in the communications. Shandley notes that supply chains are more interdependent than ever before: “The pandemic has illustrated, in stark terms, that the financial health of any given company is heavily influenced by the health of the third-party suppliers that you’re doing business with. Companies of all sizes must collaborate in real terms and with real transparency. You can’t extend favourable terms or get payments in advance unless you have a conversation with your third parties”.

Access to funding becomes more difficult – businesses which regularly make late payments to their suppliers are likely to see their standing in the eyes of their banks diminish. Banks will see this as a possible warning sign which, in turn, may make the bank less willing to provide support to that business. At the very least, the bank may decide to raise the pricing on its credit facilities. Suppliers who experience regular delays in receiving payments may find that this has a negative impact on their credit rating, thereby making it harder to obtain bank financing.

Negative publicity – unhappy suppliers may take to social media to shame a company that isn’t paying them on time. Companies must communicate effectively with their employees in such situations and train them in how to respond appropriately to complaints or criticism from suppliers.

Internal measures to protect cash flow

COVID-19 has forced many businesses in Asia to change the way they operate. Consequently, companies need to re-examine and refine their internal processes with a view to preserving maximum liquidity. Here are some practical measures to consider:

Keep on top of process changes – in normal times invoice settlement delays often occur purely because of inefficiency – weak internal processes, lack of automation, administrative errors or poor cash flow management, for example. COVID-19 brings new challenges, as staff in accounts payable may be working from home and invoices may need to be routed to new email addresses. Issuance of purchase order numbers may be subject to a new process. Companies should be contacting their customers to find out if there have been changes at their end. And if a company has changed its own processes as a result of COVID-19, it should make sure its customers are aware of these too.

Follow up on outstanding invoices very actively – now more than ever, companies need to maintain regular contact with customers, following up on outstanding invoices even before their due date, to make sure that any issues or queries that might delay receipt of payment are resolved. Companies need to ensure that their invoices are at the top of the pile for payment and should refine their internal processes for making this happen.

Credit limits and watch lists – companies should be on the lookout for early warning signals that could mean there is a likelihood of future bad debts, and keeping on top of credit limits, thereby ensuring they are in a position to react as risk levels change. Customers in high risk sectors should be monitored closely and appropriate watch lists maintained.

Credit extensions – allowances may need to be made for customers operating in sectors which have been hardest hit by the virus. Careful thought will need to be given about agreeing payment plans or granting extended terms to customers who are really struggling. Effective internal communication between credit control, sales and service is essential here.

Unpaid invoices – credit control should have a clear and well-documented escalation path for addressing situations where it is clear that invoices will not be paid. Bear in mind that there is every likelihood that legal proceedings to recover debt will be significantly delayed as a result of COVID-19.

Growing interest in supply chain finance solutions

Having considered the impact on suppliers of late payments, what can be done to speed up the whole payment process? One solution lies in the continuing development, and scaling, of supply chain finance (SCF) solutions – using new technology it is increasingly going to be possible for smaller suppliers to gain access to SCF.

Instead of using a corporate balance sheet to pay suppliers early, SCF is a well-known and popular solution which enables the buyer and supplier to disconnect the buyer payment date from the supplier collection date with a funder, typically a bank, bridging the gap. When structured correctly and implemented for the right reasons, it provides significant low-cost working capital benefits to both a buyer and their suppliers. A supplier is usually happy to forfeit a small discount to receive their payment early as the cost of doing so is calculated based on their customer’s usually stronger credit rating.

TradeIX have considerable expertise in this area, and Scott provides some thoughts on the way forward for SCF in Asia: “Popularity in SCF solutions always increases further during times of crisis as working capital and cash become an even higher priority than usual. SCF is not as widely adopted for large corporate buyers in Asia as in Europe and the US, but the level of interest in SCF in Asia since the start of the pandemic, in particular in Japan, suggests this is changing rapidly”.

SCF programmes have historically had a very narrow scope, only benefiting larger, strategic suppliers. Commenting on why smaller businesses, which desperately need the cash during times of crisis, have not been able to get on board and access the solutions developed to support them, Scott says: “This limitation stems from a lack of automation with the technology used (ie manual, human processes) and lengthy compliance and know your customer (KYC) requirements, which are different for every bank. It is not that smaller suppliers cannot be onboarded, it is that the combination of these two constraints makes the average cost to onboard a small supplier too high to warrant doing so and they are left behind. An SCF programme also creates a parallel accounts payable and payment process for the buyer – creating additional manual work required to process and reconcile back to the company’s enterprise resource planning (ERP) system”.

Scott notes that a clear, emerging trend is corporates looking for a single supplier payment solution for their entire supply chain needs and connected to their ERP – large and small suppliers, indirect and direct spend, early payment and on-time payment. He adds: “Suppliers need a secure and private lens into the buyer’s accounts payable process – approval, payment and remittance, offsets, the ability to easily reconcile back to their own ERP system and there needs to be an early payment option to all suppliers, supported by the corporate’s panel of banks”.

The key is (i) the latest cutting-edge technology and (ii) using different funding structures for different supplier groups. Combined, this drives standardisation, simplification and automation, removing expensive human-led processes. Automation drives down cost significantly and enables the scaling of SCF programmes, and thereby the inclusion of new suppliers for the first time.

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