THE IMPORTANCE OF PAYING SUPPLIERS ON TIME DURING COVID-19

The importance of paying suppliers in these challenging times cannot be underestimated.

All businesses are aware of the importance of cash flow and the devastating effect that cash flow problems can cause a business. In the face of the “lockdown” and unprecedented business constraints felt by many, companies are reliant on their customers to pay their bills, at the very least within the agreed time frame.

In normal times, meeting such obligations increase suppliers' confidence as a business partner, enabling customers to negotiate better deals and signal a sound financial wellbeing. However, we know that these are not normal times.

It is anything but business as usual during the coronavirus outbreak. Suppliers are not only faced with a cancellation of orders or the need to close stores or cease production. Many are finding that customers are unwilling to conform to agreed payment terms.

If we look at the market, we are seeing different reactions from different companies. Many retailers are frantically trying to preserve cash amid mass closures. New Look announced that it was suspending payments to suppliers for existing stock "indefinitely", telling them in a letter that the stock could be collected by its owners.

One supplier stated that New Look’s approach would devastate smaller companies down the supply chain at a time when they need help the most. The retailer has also cancelled orders for its spring and summer clothing lines and will not pay any costs towards the cancelled orders. New Look told the BBC it did not take the decision lightly. "This is a matter of survival," it told suppliers.

One small firm said New Look’s behaviour was “totally out of order”.

TK Maxx has reportedly extended supplier payment terms by 90 days after closing its online store last week amid the coronavirus outbreak. In a letter to suppliers, TK Maxx parent group TJX Europe’ chief buying officer Roger Bannister said the business and its vendor community was facing unprecedented times as the Covid-19 situation unfolds daily.

There is, however, some hope for suppliers in the form of measures taken by several multi-nationals to support them at this difficult time.

Sainsbury’s pledged to pay small suppliers immediately, benefiting 1,500 businesses with under £100,000 of business with the supermarket chain.

Morrisons is also committed to helping businesses that provide up to £1m of turnover with it, including suppliers of local food and farmers who deal directly with the chain. In total, Morrisons has around 3,000 small suppliers, including 1,750 farmers, who will benefit. Morrisons’ temporary payment terms will last until the end of May before being reviewed. Aldi also announced last month immediate payment terms for small suppliers.

In the banking sector, Ulster Bank announced that it was paying suppliers in four business days to help with cashflow.

From Monday 30 March, Network Rail committed to pay its suppliers immediately, or as close to immediately as possible, following approval of the payment ledger, with the expectation that subsequent payments flow down the supply chain.

The danger that some companies may seek to benefit from such relationships with larger companies paying on time, yet delaying payment terms to their own suppliers, cannot be discounted.

Large retailers can and must play their part in supporting the whole supply chain by paying suppliers as quickly as possible. Smaller companies also have a role to play, ensuring that they continue to make payments to suppliers, in line with trading terms.

Here at Inquesta, we have heard of many reports of companies stopping direct debits or delaying payments to suppliers because of the current crisis. It is not known whether this widespread reaction is simply a default reaction by those in “survival mode” or whether the next few weeks will see a cashflow crisis emerging in the now “dormant” economy.

It does not take an economics expert to understand what delayed payments can do to the cash flow of a supplier.

Accountants are one group who have given a lot of advice in recent times to their clients, assisting clients with applications for the various government grants and loans. Yet it is a source of concern for many that some clients may simply refuse to honour direct debits going forward.

If you or any of your clients are suffering as a result of delayed payments from customers, please get in touch for a no-obligation discussion.

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