Keeping in step is vital

The Life: When big businesses delay payments to suppliers the impact reverberates through the entire supply chain--and often hits small enterprises the hardest. Here is how to avoid that issue.
Just like a single soldier failing to march in time would upset the whole platoon behind him, payment delays by a single company to a supplier affect the entire supply chain right down to the smallest vendor. Joe Chan / Reuters
Just like a single soldier failing to march in time would upset the whole platoon behind him, payment delays by a single company to a supplier affect the entire supply chain right down to the smallest vendor. Joe Chan / Reuters

Whenever I see troops marching in lockstep I wonder what would happen if one of the soldiers accidentally tripped. A single soldier falling would surely upset the entire line behind him, and ripple through the entire troop formation.

Cash flow in a business operates in a similar way. When a large company or organisation delays payment to a supplier the impact reverberates through all of the subsequent layers of businesses, including the entire supply chain right down to the smallest vendor. Although this appears to be a monetary issue from a business perspective, the implications can also affect individual entrepreneurs.

One entrepreneur I know, whom I will call Ahmed, has a two-year-old marketing company and employs five people. Ahmed has a lot of money due in his company's receivables, but his debtors are not paying on time. On paper, his company is comfortably in the black and doing well, with sales growing each month.

But unless Ahmed takes out a loan to cover his ongoing costs, including Dh50,000 (US$13,610) in monthly salaries, he may need to shut down his business. Multiply Ahmed by a few thousand other entrepreneurs and a trickle of an issue become an economic wave.

The reason some struggle financially is because they are exposed to risk that is beyond their control as many of the companies they deal with delay payments and some default.

The way some entrepreneurs deal with this problem is to take certain precautions to mitigate risk for longer-term survival. One of the first measures an entrepreneur takes is to insist on a cash advance, which may immediately force their company out of the competition with larger players in their industry.

Other entrepreneurs try to create a cash buffer by tacking on a "doing business" surcharge, so to speak, of about 10 to 15 per cent on the cost of a job. It helps hedge before the next job and acts as a cash bridge between delayed payments. However, this tends to make an entrepreneur's price less competitive compared with other companies that are able to weather longer payment cycles.

During tough times, an entrepreneur may also decide to reduce overhead spending as a long-term strategy. Other steps include trimming staff, halting hiring and putting a hold on upgrading technology and buying new equipment as well as cancelling staff training and cutting marketing spending. Once again, this makes a company less competitive and can leave it to stagnate. It is also likely to quash an entrepreneur's passion and dampen the motivation to continue.

To the broader economy the loss is even more formidable as small to medium-sized enterprises (SMEs) create jobs and are a dynamic force that inject energy, growth and new ideas.

In my view, SME growth needs to be nurtured through the introduction of better business practices and government-backed protocols. In the UK, the government is trying to counter the crippling effect of late payments on SMEs by inviting large companies to sign a "prompt payment code" that promotes the principle of sustainable payment across supply chains. This is a voluntary initiative and one that can be a positive step for SME development in any country.

Another logical measure may be to empower collection agencies so they are more able to collect on behalf of SMEs.

Entrepreneurs that I regularly come across demonstrate the fragile interdependency of their businesses and cash flow in the economy. It shows why the business sector needs to nurture discipline in payments and raise its business standards to create environments that are conducive for SMEs to start, and for all companies to flourish.

And if all these are not compelling motivations for changing business practices, then the single most important reason for paying on time is that it is simply the right thing to do.

(Sana Bagersh is the chief executive of the marketing consultancy BrandMoxie, based in Abu Dhabi, and founder of Tamakkan, which holds seminars for entrepreneurs).

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Published: December 12, 2011 04:00 AM

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