A former coworker mentioned a prior job at a major food manufacturer. Apparently somebody realized they could mail the checks from across the country and still adhere to their payment terms. The extra day or two in the mail was worth pretty big money for the minimal effort required.
I understand the rationale behind cash flow management, but I've always been a bit annoyed at the games around payment terms. It just feels like a chain of all companies lagging payment to suppliers while expecting (or hoping) for prompt payment from their customers. I'm curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered?
You might have payment terms agreed upon, but a megacorp has no issue delaying payment an extra 60 days and will cut a check for the original amount without agreed upon late fees included. Then a smaller company is left trying to manage the relationship after their margins are arbitrarily slashed.
This was a painful learning for me when I worked for a megacorp: the bigger the customer, the less likely to pay on time.
For me as an engineering manager at the “big customer” it was a constant embarrassment. We worked with small scrappy vendors who I was on a first-name basis with. Megacorp would just never cut the checks. They would negotiate super aggressive terms to start with and then still intentionally not meet the agreed terms. I had close collaborators telling me they really needed the $$ to meet their own bills and all I could say was “I’ll send another email to purchasing and hope for the best!” Hated that so much.
I had a similar experience at a mid-sized nonprofit. We would get generous pricing from vendors with reasonable terms, then the next time around I would find we were 5 months late paying them. The internal answer was "cash flow" and "well we wouldn't want to pay them too quickly", or worse "they shouldn't be complaining, they got their check much faster than X"
Clever use of your payment terms is a valid strategy. Not respecting the agreed upon payment terms is bad business behavior, using cash flow as an excuse is just lazy. Or worse, a clear sign of financial trouble.
The common answer to this is to break the project up into a series of milestones, and then put tools down whenever payment for a milestone is late.
Generally large customers do actually have the cash, and simply have no incentive to pay on time, so why bother?
Meanwhile, their internal deadlines are very strong incentives, and can get managers in serious trouble if repeatedly missed, especially by a year or more.
I've literally had contractors working for certain BigCos tell me the companies insist on a 90 day due date on all invoices (at the end of the month of services rendered, ofc) and will still always be late on payments because they know that they can get away with it.
> curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered?
You’d need to generate credit through the financial system versus trade at some nodes.
Consider a diner. It orders ingredients. Adds value to them. Serves and collects payment. Let’s enforce instantaneous payment on this system. Now the diner has to borrow to buy ingredients. Or maybe it pre-sells “tickets.” The way some high-end restaurants do. Now the customer is financing them. If they don’t have credit, maybe this encourages their employee to pay them earlier. Et cetera.
I understand the rationale behind cash flow management, but I've always been a bit annoyed at the games around payment terms. It just feels like a chain of all companies lagging payment to suppliers while expecting (or hoping) for prompt payment from their customers. I'm curious what the world would look like if everyone was expected/required to pay within 2 weeks of services rendered?
You might have payment terms agreed upon, but a megacorp has no issue delaying payment an extra 60 days and will cut a check for the original amount without agreed upon late fees included. Then a smaller company is left trying to manage the relationship after their margins are arbitrarily slashed.