Parents are the leaders of their family. At least that’s the way it works in our house. This means being involved in all major decisions for the entire family unit, including autocracy over their children before they are of responsible age. One common and important decision made by parents every night is dinner: the family eats when and what the parents decide to provide. So, if that’s a kale salad with extra carrots, with a McDonald’s McFlurry on the side, the choice is on the shoulders of the parents, regardless of how the children feel about it.
As somewhat of an analog, dinner is served in business too, albeit it’s the top companies who hold somewhat of an autocratic power over smaller companies in the “family unit” or supply chain. These large companies, due to their buying power, essentially get to choose when and what they pay their smaller suppliers, similar to parents selecting a dinner for the family. If a parent is working late, supper is going to be served later than expected. The same goes with these companies. In fact, an analysis performed by the Hackett Group showed that companies with revenues over $5 billion took an average of 55.8 days to pay suppliers. The problems didn’t stop there. In another analysis from the Experian Business Benchmark Report, the average days paid late for companies with over 1,000 employees increased 5.6% compared to the beginning of that year. Each year, large businesses are further holding out on their smaller vendors.
Large companies with buying power understand that smaller supplier companies need them, so they are able to function in a position of strength (Porter’s Five Forces) when it comes to supplier payments. While these larger companies are waiting for their own incoming payments, they are able to optimize financial metrics (like DPO, DWC, WC, etc.) while using the smaller companies as a short-term provider of funds until they are ready to pay it back. Smart on paper, but it wreaks havoc in the supply chain and causes serious relationship issues between suppliers and buyers. The fact is, larger corporations hold onto and control the money in the marketplace; and it is at the discretion of these companies as to when and what to pay.
But why is this payments problem such a big issue? It can be summed up in one story. MusicBrainz is a small nonprofit company in California. They issued a massive invoice to Amazon, who promised $20,000—the money, in Amazon’s world, is entirely insignificant. However, this invoice accounted for a significant chunk of the company’s budget. After nearly three years of trying to get paid on their invoice, MusicBrainz finally received their money. This means the company’s money was tied up in an unusable account, while Amazon went about their business in the usual way. It is relevant to note here that Amazon’s DPO metric, at an average of 87.85 days, is considered to be a strategic financial weapon for them, and one that other large companies aspire to. However, as a supplier, this means waiting 90 days on average to receive payment for goods and services. Ouch!
This is not a knock on Amazon, but rather an example of the reality of business today, and the power that larger companies wield over supplier payments. Of course, this has ramifications, and a serious shortfall of money like $20,000 can put MusicBrainz-sized companies permanently out of business. Situations like this happen all the time. A recent report from Hackett Group in late 2013 stated that 30% of all money owed is overdue by an average of 30 days.
The bottom line is that small companies need money, and predictability of the when, and the what, of the payment. A delay or loss of payment to a small supplier could be enough to spiral it into bankruptcy if they cannot find another source of funds and the time to make it happen. This is just one of the many reasons why B2B payments is in need of a complete overhaul. Many things in business can be unpredictable, but getting paid shouldn’t be one of them.
Traxpay brings total transparency in B2B payments. This means being right on the money and the data 24/7/365, anywhere, anyhow, and transforming the way that businesses pay and get paid in B2B. In the context of this blog, you could say we’re helping the family unit (supply chain) get fed. With Traxpay, dinner is served.