Most inexperienced, small suppliers are so eager to supply that they hardly pay attention to the words ‘payment terms’. Yet the timing between cash outflows (as a business extends its service or sells a product) and inflows (as it receives payment for the said service or product) is the single most important factor in business growth, success and sustainability.
Considering that articles and research papers have proven that a lack of cash flow is one of the significant causes of the demise of small businesses worldwide, Sipho Pilime, The Hope Factory business mentor wonders if suppliers and buyers are willing to put payment terms under the microscope and admit that both sides have responsibilities in resolving the early-payment-saga, in this month’s SmartProcurement.
Young or aspiring entrepreneurs are fearful of things like “what if my business just doesn’t take off or the market rejects my new innovation?” Hardly ever does one hear a young or aspirant entrepreneur dread or anticipate having sleepless nights over cash flow problems after his or her goods or services have all been bought and he or she is now waiting for payment… 30 days after statement.
Turnover is vanity. Profit is sanity. Cash flow is king
When considering payment terms, suppliers must consider:
• For some, the very distinction between “30 days from invoice” and “30 days from statement” is unclear.
• Cash and early payment discounts.
• Are you ensuring that your effort is duly recognised and rewarded in the quoted selling price?
• Is the level of profit margin for the sale taken into account?
“A lack of profit is like a cancer. If it carries on for a long time, it will eventually kill you. But a lack of cash is like a heart attack. If you can’t pay the rent, you shut down just like you would if your heart packed up. You’re finished. If you can’t pay the wages, it’s all over. Don’t be without cash. You can live without profit, but not without cash,” said Theo Paphitis, one of the UK’s most respected high-profile businessmen and former Dragons’ Den star.
During my tenure as a Hope Factory business mentor, I have been privy to shocking stories concerning late and (in some cases) non-payment for goods and services, which have adversely affected some of the entrepreneurs that I mentor. The ‘perpetrators’ in these instances are well-respected corporate South African companies, government departments and parastals.
If one considers that the economic engine that drives successful nations is small business, it begs the question: why do so many South African corporate clients from the private and public sectors delay payments to smaller suppliers in a country where several ED initiatives actively promote SMME growth?
Perhaps it emanates from administrative bureaucracy, or business strategy not filtering down to business processes? Senior personnel from almost every major player proclaim at SD or ED conventions and expos that preferential payment terms will be extended to SMMEs, i.e. paying them earlier than other suppliers.
Or could it be that these major players are changing their mindsets on the need for preferential payment to SMMEs? Are we to take a cynical view that the aforementioned proclamations are insincere and merely just a good PR exercise?
Whatever the reasons, there is a need for change… a change that will enable a vibrant small-supplier sector and indeed a more sustainable economic reality for South Africa.
Importantly, responsibility lies on both sides: corporate SA must begin to change their views around small business from a compliance or, equally damaging, pity mentality to a mindset of long-term development and socially responsibility. Small suppliers must invest time and effort into better understanding corporate SA’s payment cycles, improving their overall business ethics and financial acumen. They must begin to understand and incorporate mature business principles and become competitive and viable supplier alternatives for big business.