Good Honest Dollar $$

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.