Good Honest Dollar $$

It was a truly shocking comment.

A few weeks ago, I was in a store in Itaewon, a major shopping district for foreigners in Seoul, where two young Afro-Americans were engaged in somewhat negotiations with the Korean shopkeeper over the price of a pair of pants.

The process quickly became hostile, and the young men stormed out in disgust after the shopkeeper in question declared that he did not like ‘nigger money.’

The comment was shocking, as were the shopkeeper’s subsequent actions, where he looked at me (the only other customer in his store) and repeated his comment.

Apparently, he thought that because I was white, that I would somehow be impressed by his racist viewpoint.

Naturally, he was mistaken. Utterly disgusted, I got out of his store without making any purchases as quickly as I possibly could.

 
Racism still a reality
The above incident highlights a most unfortunate truth - racism is still a reality in modern business practices.

Another example – last year, a Korean teacher from a school located nearby where I lived asked if I new of any native English teachers who would be willing and available to teach at his school.

When I suggested a particular young South African woman, the immediate response of the teacher concerned was to enquire about her skin color, and he seemed somewhat relieved when I told him that her skin color was white.

Evidently, a white young lady would suit the needs of his school nicely. Dark skin, on the other hand, was not preferred.

Granted, the above examples relate only to the situation within South Korea, but unfortunately, I would bet that racist attitudes are still prevalent in business practices throughout many different countries.

 
The right to choose is no excuse for discrimination
Broadly speaking, I feel that businesses have a right to decide: (a) whom they serve; and (b) whom they are served by.

Business owners have a right to define their target clientele, and should, depending on the circumstances, feel as though they are well within their rights to refuse service to particular individual customers. They are also well within their rights, again within reason, to refuse to hire particular individuals as employees.

But this does not give them a right to practice mindless forms of discrimination, and the attitudes demonstrated in the above examples simply should not be considered to be acceptable in modern business practice.

 
When does a business have a right to discriminate?
Some would say never.

I would not entirely agree, but I would stress that any range of circumstances where any form of racial discrimination should be considered acceptable would be very, very narrow.

I would feel that it would be acceptable, for example, for a bar or nightclub that wishes to promote an ‘Asian night,’ to refuse admission to patrons of non-Asian background on the night in question.

Or how about an organization whose clientele consists primarily of members of religious communities? I would think that it would be somewhat understandable to some degree if such organizations demonstrated a preference in the hiring process for employees of a racial background which is similar to that of the main clientele.

In these types of examples, the decision to allow racial factors to influence behavior is based around genuine concerns with respect to the creation of an environment in which clientele feel most comfortable and at ease.

 
But mindless discrimination is not acceptable
But the type of situation to which this type of consideration would apply would be very limited indeed, and there is absolutely no room for the type of mindless discrimination displayed by the Korean shopkeeper mentioned at the beginning of this discussion.

Straightforward bias against individuals of a particular race or skin color should not be considered acceptable practice, and one would have hoped that the modern business environment would have been free from that ugly behavior by now.

In last week’s discussion, I wrote that under normal circumstances, the practice of delaying payment of supplier invoices until after the due date was a substandard business practice - both from the viewpoint of ethical considerations and also from the viewpoint of business case considerations.

That’s under normal circumstances. But what about times of financial difficulty, where firms suffer from cash flow shortages? Is late payment acceptable in such circumstances?

 
Only in dire circumstances
First, it’s important in my view to state out front that late payment of supplier invoices should never be considered except in the event of significant liquidity problems.

As I noted last week, the practice can has considerable drawbacks from a business case perspective, and these can have severe consequences. Not to mention the ethical considerations involved.

Supplier invoices must be paid on time if at all possible.

 
Temporary trouble versus ongoing difficulty
In addition, it is important in this context to make a distinction between firms which experience difficulty in meeting payment deadlines on a frequent basis and those which suffer such an experience on a temporary basis only.

Firstly, let’s deal with the former.

Consistent failure to meet supplier payment deadlines is completely unsatisfactory, and any firm being forced into such a situation faces a serious problem. Such firms must take whatever action is necessary to rectify the situation without delay.

Suppliers should not have to put up with such customers.

 
Good firms, tough times
What about firms with a good credit rating and payment record?

Where such firms are confronted with difficulty in meeting payment deadlines, management must make an assessment – is this a once off, temporary problem, or is it likely to become a recurring issue?

In the former case, provided the situation is handled appropriately (see below), I do not see a problem with missing one or two payment deadlines – at least from an ethical perspective

In the latter case, management must not delay in undertaking whatever action is necessary in order to resolve their anticipated cash flow problems.

 
Proactive action required
Even in cases where firms with good credit ratings have a reasonable expectation that their liquidity problems will not be ongoing in nature, the late payment of supplier invoices is a delicate issue, and any firm in such a situation must take extreme care to manage the situation in a proactive manner.

Affected suppliers should be contacted and made aware of the situation prior to the due date of the invoice. If possible, arrangements should be made for a revised payment schedule - which must be honored at all costs.

Not only are such steps a matter of common professional courtesy, they go a long way toward mitigating the impact of the situation upon key supplier relationships. This, in turn, may have a positive effect upon the quality of service received from suppliers and the terms upon which that service is provided.

Such actions also help to alleviate any supplier suspicions about the financial position of the firm, particularly if the firm subsequently meets the full requirements of any revised payment schedule.

With the onset of difficult times, one business practice which may become increasingly common is that of firms delaying payments to their suppliers beyond the due date of payment.

This is commonly referred to as ‘stretching your accounts payable,’ and the practice raises some intriguing questions –  about whether it is fair and whether or not it makes business sense.

In my view, there are very strong arguments against this practice, and it should be avoided in all but the narrowest of circumstances.

Today, I would like to discuss the benefits and drawbacks of the practice from the viewpoint of a firm which is in a satisfactory state regarding financial position and cash flow.

Next week, I would like to discuss the viewpoint of firms which are facing financial or cash flow difficulties.

 
Why wouldn’t you pay on time?
What would a firm which is in a reasonable cash flow position have to gain from not paying supplier invoices on time?

Firms with considerable bargaining strength may be tempted to adopt such an approach in order to gain an extension to what is essentially an interest-free loan.

Trade credit is usually provided on interest free terms. Where procurement of supplies involves use of such a facility, the supplier concerned is effectively making a short term interest-free loan their customer.

Firms can immediately employ the cash outflow temporarily saved by the use of trade credit to meet operational funding requirements of their business, or to pay down debt on interest bearing loans, and thus reduce the daily or monthly balance upon which interest is calculated.

By the purposeful act of stretching its accounts payable, a firm effectively extends the time-frame of this interest free loan, thus increasing the value of the benefits it receives from its use of trade credit.

 
Why you should pay on time
Nevertheless, there are considerable drawbacks to such a practice, and these clearly outweigh any benefits in the case of firms with the capacity to meet payment deadlines.

These drawbacks include:

 
• Etiquette.

Basic etiquette dictates that all financial obligations should be paid in full on or before the due date, and supplier invoices are no exception.

The practice of purposefully neglecting to comply with supplier credit terms represents both disregard for common business etiquette and a lack of respect for the supplier concerned as a stakeholder in the firm.

 
• Reputational damage.

Late payment of supplier invoices on a regular basis has an adverse impact on a firm’s reputation as a customer, which in turn has a further adverse effect the quality of service which the firm receives from suppliers as well as the terms upon which supplies can be procured.

Customers who consistently meet payment deadlines generally receive higher priority service as well as more generous discounts and/or credit terms than those who fail to meet payment deadlines.

 
• Costs to suppliers.

Late paying customers place an unfair burden upon suppliers, including costs associated with follow up of the payment (processing, debt collection agencies and labor costs), difficulties in terms of cash flow planning and the potential for their ability to meet their own payment deadlines to be compromised.

All of this, not to mention the opportunity cost associated with the late receipt of cash, makes late paying customers a burden which suppliers should not have to bear. 

 
• Perception of financial difficulty.

Late payments can lead to the suspicion that the firm may be facing financial difficulty.

Where such a suspicion arises, the impact extends well beyond the firm’s relationship with suppliers. Customers may become reluctant to deal with the firm due to concerns relating to product warranties or continuity of service. In addition, staff may be tempted to consider leaving due to concerns about ongoing employment prospects and payment of entitlements.

Add to this the reaction of investors, and it becomes clear that suspicion of financial difficulty should be avoided at all costs.

 
• Late payment fess/early payment discounts.

Last but not least, late payments can involve a direct financial cost, either due to the incurrence of late payment fees or the forfeiture of any applicable discounts for early payments.

 
A better approach – more favorable credit terms
Add all this up, and it is not difficult to see that firms whose cash position is sufficient to meet their payment commitments should avoid the practice of stretching their accounts receivable.

Firms with a considerable degree of bargaining strength have a far better option – the negotiation of more favorable credit terms, which provide similar benefits in terms of an extended interest free loan but without the drawbacks listed above.

This approach is available only to firms with sufficient bargaining power. Nevertheless, any firms with sufficient capacity to meet its payment obligations by due dates should do so.

Both ethical and business case considerations demand no less.

Today, I am delighted to have sales and marketing professional Brad Shorr as a guest writer on this blog.

Brad has many years of business experience, and in his discussion below, he talks about the need for organizations to hold discussions with their staff about the most effective ways to handle specific situations in which they may encounter potential ethical dilemmas in the course of their duties:

 
I’ve been a big fan of Andrew’s blog from the moment he told me about his theme, business ethics. It’s a topic that deserves much more attention, and I love how Andrew is able to give us a clear yet high altitude understanding of complex ethical issues.

For my guest post, I’d like to turn the tables a bit and talk about what business ethics look like from the trenches. Since that’s where I’ve spent most of my career, it seems like the logical place for me to go.

It’s been said that ethics is what you do when nobody is looking. In day to day business activities, nobody is looking pretty much all the time. I’ve worked in environments where management requires detailed call reports and looks over employee shoulders continually, but the fact is, people can get away with just about anything if they are so inclined.

Well intentioned or not, in the trenches it is difficult to tell when you’ve crossed the ethical line. Hypothetical: Supposing a customer overpays you by $10 on a $1000 invoice. Would you pocket the $10 or credit it back?

It’s quite easy to justify pocketing the $10. Processing the paperwork will cost the customer more than the $10 in question. I’ve certainly given that customer more than $10 of free service in the past, so this just evens things up. It’s the customer’s responsibility to pay properly, not mine. Ten dollars is nothing – why bother with it at all?

Even when the choice is made to refund the $10, the choice might be made for less than ethical reasons. For instance, the seller might think, I’ll show the customer how upstanding I am. Perhaps in the future I’ll be able to use it to my advantage for a greater gain.

So, even in a simple situation like this, discerning right from wrong requires a good deal of thought and reflection. But the seller could be faced with more complications still. Suppose the customer always pays 90 days beyond terms. Suppose the customer is notorious for taking unauthorized deductions or grinding suppliers’ margins into the ground? Do those considerations affect the decision of how to handle the extra $10?

And what about the big picture? In the trenches, we don’t think about that a lot. But any employee who cares about the success of his firm should. I might be able to justify keeping the $10, yet if my colleagues applied my same reasoning, my firm might overcharge customers by tens of thousands over the course of  a year. Conversely, if our firm had a policy to refund regardless of circumstances, we might forgo tens of thousands in revenue leading to a reduction in salaries and bonuses. 

In my experience, well intended business people will reach different conclusions about how to handle my hypothetical $10. Does that mean business ethics are situational? Is it possible to devise a rule to cover all variations of even the simple example in this post? I’ve been in business for more than thirty years and to tell the truth, I don’t know the answer to either question.

What I do know is, whether a firm has rigorous ethical guidelines or none at all, discussing ethical issues that occur in the trenches is a must. Discussion serves as a collective conscience. While some may not agree on the ultimate decision, everyone comes away with a new perspective and a deeper understanding. These things make it likely that the next time a problem crops up, it will be handled better and more swiftly.

How would you handle my $10 example? Perhaps we can put my theory to work and see if discussion brings clarity!

Andrew, thank you so much for giving me the opportunity to be a guest author on Good Honest Dollar $$!

 
About Brad Shorr 
Brad Shorr lives in the Chicago area, and is president of WordSell, Inc. He helps organizations strengthen their online business presence with business blogs and compelling web content.

Brad writes extensively on his own and many other blogs, mainly about writing, online marketing, entrepreneurship, sales and business humor.

This article focuses on predatory pricing, the use of aggressive pricing strategies in an attempt to eliminate competitors.

Specifically, this article examines two questions – whether or not the practice is ethical and whether or not it should be allowed.

 
What is predatory pricing?

As stated above, “predatory pricing” refers to the practice of large business using aggressive pricing strategies in order to eliminate smaller competitors.

The practice involves price cutting for a short period of time to the extent that profit margins become unsustainable. Often, under this strategy, products or services are sold at below cost.

Large business, with strong balance sheets, can sustain the associated losses for a considerable time period, particularly where losses involved can be subsidized by profits from other product lines. Smaller competitors cannot.

The result – smaller competitors are forced out of business whilst the surviving companies face a less competitive operating environment.

 
Is predatory pricing unethical?

Provided it is done within legal limitations, predatory pricing is not unethical.

Business is a fierce and competitive environment, and where companies have strong balance sheets, they are entitled to use this as a competitive weapon.

Ethical behavior is important, but business is a hard ball game and industry players need not show kindness toward competitors.

If you can’t stand the heat, better stay out of the kitchen.

 
Should it be allowed?

Not in my view. In many countries, predatory pricing is not allowed, and rightly so.

Whilst not unethical, the practice is harmful to the economy in at least three ways:

• It can destroy otherwise viable firms.
• It discourages the entry of otherwise viable firms into the market.
• It can lead to a concentration of power within industries and the creation of monopolies or oligopolies. In the resultant less competitive environment, firms are under less pressure to innovate or improve product quality and customer service.

Accordingly, whilst not unethical in itself, economic considerations dictate that predatory pricing should not be allowed.