How to Make Large Companies Pay

Three short paragraphs could save small companies and the rest of industry over £1 billion a year. And there are no costs involved. No expensive computers. No extra staff. Noth­ing. Just three paragraphs. Around 300 words. It must be the biggest bargain of all time.

Like most of British industry small firms are probably finding it difficult to get the money in and are being stretched to the limit. Probably by companies bigger than themselves. And probably by companies who know the small firm won’t squeal until the very last minute because it is frightened of losing their business.

Large Companies Pay

Our research shows that companies are now taking longer and longer to pay their bills. In 1984 accounts were being settled on average 53 days after they were due to be paid. In 1985 they had stretched out to 60 days. With interest charges costing over £400 a day for every £1 million outstanding, it is costing industry an unbelievable and unnecessary amount of money.

And it could all be avoided if companies included a single three-paragraph contractual interest rate clause in their terms of payment. It would save companies the time and effort involved in going to court. It would also speed up payments overall, boost cash flow and reduce interest charges.

This is a widespread practice in the rest of Europe and North America. In Denmark, for example, every invoice has a pay­ment date. If it is not paid by then 2 per cent is added without question and repeated every month automatically until the account is settled. Its absence in Britain may be yet another symptom of the lack of such attributes as confidence in the serv­ice provided, thoroughness, pride and professionalism which have for so long characterised our national approach to the market place.

It is all the more surprising since it is not very hard to realise that funding a business from a source other than sales revenue costs money. The cost is illustrated by the following table which charts the cost of £100,000 overdue assuming an interest rate of 15 per cent:

It is sad to realise that it is no longer sufficient to offer a modest discount to ensure that one’s invoices are paid on time.

If we accept that there are unnecessary costs being carried by the firm arising from slow payment of invoices, the next ques­tion to be considered is who should foot the bill. Should it be passed on to those consumers who pay on time, thereby mak­ing the firm uncompetitive in its pricing? Should it be borne by the firm, thereby making it inefficient in terms of rewards to its shareholders? Or should the culprits pay and realise that they will need to look elsewhere for free unsecured loans in future?

Part of the answer is to incorporate in one’s terms and condi­tions a clause entitling the supplier to an interest rate of, say, 2 per cent above MLR until payment has been made in full. To be effective the clause must be incorporated formally in the conditions of sale and must be brought to the attention of the purchaser prior to the goods/services being supplied.

1. Clause one should stress the company’s terms of payment are 30 days from date of despatch; that in the case of default they reserve the right to suspend deliveries and take steps to recover the outstanding amount as well as compensation for losses incurred.

2. Clause two should say the seller is entitled to 2 per cent interest above Bank of England minimum lending rate from the date until the account is settled.

3. Clause three should forbid the buyer from withholding pay­ment in whole or in part because of any disputes.

The invoice should state unambiguously the due date and refer me appropriate clause. There must also be no dispute, ie the debt must be accepted.

It is so simple, I cannot understand why companies don’t do it already. Everybody says payment in 30 days. But it’s the red lie of the credit industry. Few people stick to it. Maybe less than two in a thousand. So long as people get paid eventually nobody seems to worry. It’s absurd.

Filed Under: Uncategorized


About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.

RSSComments (0)

Trackback URL

Comments are closed.