In business, payment facilitates the exchange of goods or services. However, without escrow or bonded warehousing, trust is paramount to ensure that your trading partner fulfills their obligations when you’ve fulfilled yours.

 

Businesses Are Built On Relationships

Supplier-client relationship that form the foundations of a business extend throughout the supply chain.

While we strive for mutually beneficial outcomes, any relationship can become abusive. Ideally, the stronger partner would assist the weaker for the mutual benefit of the relationship. However, the reality isn’t always so straightforward.

Complacency can creep in and start eroding the discipline and respect that are the cornerstones of a successful relationship. Late replies to emails can lead to missed payment deadlines, and partial payments become the norm. Before you know it, you’re dealing with a delinquent account. I understand this. I’ve lived both sides of this narrative.

 

Relationship Red Flags

Regardless of the cause, any late or non-payment constitutes a serious and disrespectful breach of trust that should serve as a red flag.

Imagine if you were an employee in a company that began paying suppliers late. Would you feel secure and satisfied in your job?

Paying suppliers on the agreed time frame should be non-negotiable. You can describe it as an ethical practice, a courtesy, a sign of respect, or best practice. But it should be done.

 

Cashflow Costs Money

Every company could benefit from more cash in the bank or improved cash flow. While daily operations may not be significantly impacted by lines of credit or overdrafts, they incur costs to the business.

Furthermore, managing customer credit within an organization also incurs expenses.

For instance, I once received a call from a branch of a major pharmacy chain, let’s call it “Wellingtons.” They requested the supply of a few products and asked us to send the invoice to their head office for settlement. Eventually we spent two hours of administrative time chasing them, never receiving payment either.

On another occaision, we were invited by Amazon to supply our own brand products through their Amazon Vendor program. Flattered, we immediately signed up, assuming that our dream had finally come true.

However, we soon discovered their 90-day settlement terms. One of the world’s largest companies aggressively pressures its trading partners into accepting 90-day terms for tangible goods that require manufacturing and shipping before the clock starts.

To add insult to injury, they offer an advance at 30 days, but only if you pay a 2% fee. Yes, you pay a 2% fee to unlock your funds at 30 days.

These are just two examples of payment ethics that I often cite, along with asking people to estimate the cost of running an Accounts Receivable department.

 

The Best Way Forward?

There are two options: either pay banks for lines of credit and finance, or pass the burden on down the supply chain. If we pressure our suppliers to provide us with 90-day credit, how will they manage that? Will they opt for finance or pass the burden on? Ultimately, without purchasing finance products, someone isn’t getting paid on time.

From an ethical standpoint, what is considered a normal business practice is actually quite skewed.

Smaller companies with limited resources face a disadvantage compared to larger companies with relatively larger resources. The smaller company would have to solicit business that requires prepayments or larger deposits, or increase their sales price to cover the finance costs. Conversely, a larger company could outbid them by eliminating these cash flow-related obstacles.

Of course, settlement terms can be negotiated between consenting adults, and there’s no issue with that as long as payment schedules are met.

 

What Should Be The Goal?

Imagine if the entire supply chain were flush with cash (let’s hold off on comments about inflation for now, please!). Everyone would be fully prepaid.

In such an ideal scenario, the stability and security of the supply chain would be enhanced. There would be greater resilience and a reduced risk of a link in the chain breaking due to insolvency.

The supply chain would become more fluid, allowing suppliers to hold more stock.

Banks would share a smaller portion of the profits.

Undoubtedly, the mental health and productivity of entrepreneurs and business owners would improve. Their focus could shift from micromanaging cash flow to developing the business that brings them greater personal satisfaction and stakeholder benefits.

 

Personal Experience

I personally have experienced situations where business conditions dictated that suppliers would receive payment late. It’s an unpleasant position to be in, and I take no pride in it. This guilt motivates me to share my thoughts, feelings, and ideals in this post.

 

How Can We Implement Change?

Like many things we recognize as wrong, it’s not practical to implement immediate change. You can’t instantly transform the cash flow and balance sheet of your company with a wave of a wand. However, like any behavior, change can be introduced gradually.

Eliminating plastic from our lives overnight is an unrealistic expectation for most of us. Instead, we can start reducing our plastic consumption and making more conscientious purchasing decisions.

Similarly, we can all strive to be more prompt in meeting agreed payment schedules. We should always consider the option of switching to pre-payment arrangements when available. Saving some extra liquidity on our balance sheet can enable us to secure better deals on cash purchases. If we have the funds, why not pay a supplier early instead of waiting until the settlement date?

 

Putting Our Money Where Our Mouth Is

Here at Ethical Family Living we initially set out with zero financing as our primary goal.

Starting with a clean slate and a clear objective made our position easier to maintain than constantly changing it.

While we still have room for improvement, a clear understanding of the ethics of cash flow and timely payments motivated us to adopt a no-credit policy for our customers. This allows us to offer lower prices to all customers, regardless of size, rather than burdening our entire customer base with the expense of financing a few customers.

We pass the benefits of this positive cash flow position to our suppliers, a growing majority of whom are either pre-paid or paid upon delivery.

While overcoming this challenge and taking minimal financing does slow our growth, having just the smallest of financial constraints is a liberating feeling.