Can you postpone paying your telephone or electricity bills by a couple of months by sweet talking your Utility providers? Would you continue working for a company that paid your salaries after you had to wait outside the accountant’s office for hours? Would you ask your kids to tell their school that their fees will be paid by their parents ‘soon’ ?
If the above sound ridiculous, why is it that Companies routinely pay their suppliers late?
The basics:
Assume that you walked into a Café and ordered a Cappuccino. Once you have finished, you would either settle your bill by cash, credit or debit card. That means that the money almost immediately transfers from your account to that of the Café operator. If this café is a profitable business, at the end of the month, everyone associated with the business should be paid. On the outside, credit should be a month long. Ok, make it two months max.
What really happens:
Payments that are made without delay are Rents, Utilities and Salaries so that the business is kept alive.
Payments that are made with some procrastination are to suppliers, packaging guys, etc. The attitude is ‘where will they go’, or if not X then Y is always available to sell to us.
Payments that need begging and groveling to be paid are to advertising and media agencies, event agencies, travel agents, etc. The simple rule here is that even if I don’t pay these helpless folks, my business will simply go on.
Some deeper reasons for ‘late’ to ‘never coming’ payments:
The business model of the buyer is inherently broken:
Examine Companies that pay really late and you will see a business that actually is losing money. Accountants tricks (the results they declare in the newspapers) aside, there is a gap in ‘cash in’ and ‘cash out’. This is the reason why a ‘Ponzi’ scheme is used (pay Peter of yesterday from Tom’s money of today). Sahara airlines, was an epitome of this model. 20-30% of their seats were given away as gifts to Govt. Officials or friends and family that were never paid for! Beware of such Companies. Many ‘reputed’ companies execute media campaigns in the hope of selling a new product. If that offering fails (remember the launch and failure of ‘Cease Fire’- the fire extinguisher brand), there is an immediate gap in cash flow.
Don’t be happy when someone buys something from you. Be convinced that they make money from what you gave them and hence will be able to pay you eventually!
The business is cash break even but not profitable.
Simply said, the Company is not able to afford anything beyond day-to-day expenses. So, if a new office is bought and refurbished or large investments are made in say machines and equipment, then suppliers actually are punished to pay for it. From an accountant’s view, the company cannot cover its depreciation and amortization (write off) costs. Lots of the old textile firms, manufacturing businesses, etc. are in this circuit.
Inherent fraud in the business.
If you examine the case of Subhiksha, its inconceivable how hundreds of crores left the balance sheet over a few weeks. All this after astute investors like ICICI Ventures and Azim Premji had just invested in the Company and done a deep diligence.
If the promoters are taking money off the table, the business will sputter and choke and you will be left holding cheques with invisible ink on them.
It’s a very long-term gestation play.
Some businesses like Telecom, Power, and Infrastructure are in ‘investment’ mode for years. It takes 10 years to build a dam. In that process, with no cash flow, all the payments come from Capital that is always heavily controlled. Suppliers of the Mumbai Sea Link waited for years to be paid.
It’s just an attitude!
Some Companies believe that they should pay late because suppliers are meant to be paid late. They feel ‘guilty’ if they pay vendors on time. Once I asked a CFO of a 200 crore Company how they prioritized payments – he said ‘depends on who calls us most often and which parties make people sit in our offices. Usually we wait for a legal notice to pay out large amounts’.
If you are selling something to somebody, make sure that:
Every claim of yours is documented and signed.
A reputed media Company recently did not pay one of our firms – Media2win despite us having fulfilled all our obligations. Our paper work was perfect. We filed a ‘winding up’ petition in the Mumbai High Court against them and recovered our money in less than 18 months! So, in such cases, going to court does work. It doesn’t take 20 years.
Don’t be embarrassed to badger debtors for your money! It’s not a favor they are doing you.
Believe it or not, I know folks who have hired ‘follow up’ staff, whose job is to land up in their buyers offices in the morning , sit on the sofas, keep badgering the accountant folks for money and go home at the end of the day to repeat the same process next morning. If you deal with the government, you can hire ‘brokers’ to do this for you. But in India, if you aren’t after someone to pay you, they never will!
Factor in interest and more importantly the ‘cost of mental agony’ of dealing with a company in the price you sell to them.
It is my estimate from having been working for 20 years now that suppliers to really troublesome Companies charge them almost 25% higher costs than they would charge to normal customers. In the world of business, everything is costed for. Just add the ‘pain %’ in, and you will be way more relaxed when payments get delayed since you are getting extra money for the pain!
A long-term proposition is to have a ‘payment rating’ index that ranks and rates companies on their payment ‘hygiene’ like Crisil does for Companies’ credit worthiness or Moody’s does for a country’s sovereign risk status. This will create a supplier reputation index to help vendors decide if they want to supply to a Company or not. Obviously badly ranked companies will improve on payments to move up the ranks.
Sounds gloomy? Every cloud has a silver lining. For years we did business with Nestle Delhi. I remember my office boy telling me ‘ Sir, each month I know it’s the 7th coz that’s when the Nestle Cheque arrives without fail.’
Sign up for free Rodinhood.com posts below:
Anyone who likes any of the blog posts is free to reproduce the same without my permission. Do mention my blog’s name (Rodinhood.com) and its link www.rodinhood.com as the source.
Reach me on Twitter , Facebook & Linkedin.
Print 
PDF 
Related posts:
Hi Alok. Facing the same problem. I run a middle level CA Firm. One of the top 5 MNC’s of India(cant name it here) is sitting on 5 lacs of Invoices raised by us. The only issue here out is we always did work for them on verbal assurances of Managers. What’s the best way you suggest to get money out of such Companies.
Hi Mr.Dodrajka,
Try to resolve your issues with your that particuler reputed MNC and try to deliver best services to them by utilising your
best associates. You just see the impect. They will definatly raise your all outstanding payment.
Sanjay,
try writing to a manager two levels up from the manager on whose verbal assurance you worked. If you do not get a response, send the same letter again to the CEO and the Chairman (Global) of the MNC with a cc to the manager in question.
Works, believe me.
Aah.. you have spoken my heart.. totally!! Am going to share this with my clients.. lol!
I know how it feels! I’ve been on the receiving end. Especially with PSUs where you literally feel powerless against the ‘powerful’ accounts person who has to release your cheque (which has already been approved and signed and sitting in his drawer!).
I believe most companies which have been on the receiving end tend to have a better in paying off their suppliers. Don’t you agree?
Ahh…Again a wonderful post. DUKHTI NUS PE HAAT RAJH DYE sir jeeee
Your idea to make arating and ranking is really great
Great post. Please provide an RSS link on your website, I just found by accident
– rodinhood.com/feed
Hi Alok,
As usual a very innovative post which has activated the thought process in many.
I want to point out a learning which finance professionals/ managers get during their course. I am talking about general finance practices which is followed by majority of the corporates : Get the money as soon as possible, delay the payments as far as possible. In both instances, intention is to retain the capital in the company as long as possible.
You have also pointed about the pain% being included, that is very true. Company do charge premium for the risk as it shown in the billing. This risk includes everything (pain% as well).
Payment Index – Very interesting concept and also funny. But what puzzles me here is why should a big cap supplier having a good liquidity bother about payment index ratings. Supplier market is a RED Ocean, if you are not willing then somebody else may be a MNC would be ready to supply to low rated company. In such a case, supplier strictly following the index would eventually loose the market share. You have already mentioned about the suppliers of Worli Sea link.
Overall, a very interesting post.
Regards…
Sanjiv
Spot On!
I completely agree with you and I seriously hope that companies should be ranked in CRISIL like format based on their payment to suppliers. And you surely did hit at home in the manner in which you described the way advertising and media agencies are treated by companies. They surely make you beg! I simply don’t understand why, despite being in a Corporate set-up and while claiming to be “Professional” and expecting “Professional” work, why do these Companies – big, medium & small – start acting like Govt or Lala companies wherein they make you run after them to get your professional fee, which they should have paid in the first place?
I sincerely wish your suggestion is taken into account.
Very true Alok.
I too have the experience of working with media agencies as well as MNC brands. While the MNC clients are extremely straight forward and ask us to collect the cheque the day an invoice is raised, it is usually not the case with media agencies. I still have nearly 5 lacs outstanding with a ‘prominent’ digital marketing company based out of Lower Parel for the past 3 years… Every time I call the CFO, she says we will pay you when the client pays us!!! Rubbish. I know they have already received the payment and sitting on it for months now. Hightime we file a suit against them.
You raised good points Alok. I think it is primarily the attitude. I worked for Google for 5 years and there isn’t any doubt on the clout it wields, but Google still pays the suppliers on time (if the paper work is proper). Paying late or taking advantage of lesser bargaining power of your supplier is an old world attitude. A business can bargain hard but has to take pride in being a good pay master. I wonder when this will dawn on Indian businesses.
Alok,
Going to take a different view on this. I believe if someone didn’t pay you aka any company- then its also because the company started a cycle by withholding someone’s payment. I believe what goes around, comes around at some level. And if someone didn’t pay you despite efforts, then the universe will work its backside to pay you off and you make more money in the bargain.
I believe in this because I see it in my daily life- when I pay my bills on time, I get anything owed to me on time. I keep my word and the world does and the lesson in corporate life is not v different either.
Interesting and practical narration ……..it delievers the ground level position …. wonderfully put sir….