Cash and carry – making the food sector supply chain work
We are all familiar with the idiom that “Cash is King”, and know how crucial cash flow is to any businesses’ immediate health and ultimate prosperity. But how easy is it really for a business to ensure that it achieves a solid cash flow management?
The difficulties facing businesses trying to achieve this Holy Grail are no better highlighted than within the food and drink supply chain.
Supermarkets have been cast as the bad guys when it comes to late payments. However a new survey by The Grocer reveals that big food and drinks companies are far worse. Many take over 60 days to pay suppliers and at least 15% pay outside agreed terms. AB InBev, as an example, took an average of 132 days to settle supplier invoices. This compares to 45 days taken on average by the big 4 retailers to pay suppliers.
Although there is no legal governance of contract terms covering payment periods, they should be ‘fair’. MPs have suggested that payment terms that run over 60 days are unacceptable. Indeed, the Federation for Small Business revealed a third of small businesses in the UK have run into cash flow problems resulting from late payments.
The fact is that delays in payments of invoices have an effect right down the supply chain. Farmers in particular often don’t have financial reserves, so cash flow delays can hugely affect the stability of their business. Likewise, 97% of the food and drink industry in Britain are made up of SMEs. Therefore many in the sector rely on regular payment for goods supplied to larger manufacturers. At present they are literally carrying the cash flow burden. But with little or no leverage, in practical terms there is very little that those further down the supply chain can do to improve their cash flow.
Inevitably the response from large food and drink businesses is to defend their practices. They say their terms are in line with industry norms, and that they work with suppliers to agree suitable commercial terms. They also state that their smaller suppliers are often on shorter payment terms. But with the health of supplier businesses essential to the ongoing success of their larger customers, shouldn’t there be an incentive to take care of the entire supply chain?
It’s not all doom and gloom however. This position contrasts with the supermarkets who fall under the Groceries Code. This is because they are now speeding up payments, particularly to small suppliers. The bigger picture shows improving payment practices. Previously withholding payments for reasons such as delivery shortfalls was rife; as a result of the Adjudicator’s recommendations. Suppliers are given notice of any proposed deductions and the opportunity to challenge these. This removes a degree of financial uncertainty for those supplying retailers.
We regularly assist suppliers to reduce their overdue debts and ease their cash flow burden. In our experience, the most practical and effective ways to achieve this are to have:
- bespoke terms and conditions that are properly incorporated into their business relationships;
- a late payment routine that all staff are aware of and can implement efficiently;
- a good relationship and rapport with their customers to highlight any issues early;
- a robust and immediate procedure to recover late payments.
Surely, it benefits the entire food and drink supply chain to work cohesively and collaboratively to function effectively. Whilst those businesses further down the supply chain can seek to maximize what little practical leverage they have, sometimes that has limited effect.
Isn’t it time that the food and drink industry took a step back, looked at itself as a collective unit, co-existing for each other’s mutual benefit. Then agreeing upon a united set of commercial trading standards to ensure a level of fairness and consistency is applied across the entire chain.
If you are having problems with late payment by suppliers, contact Simon Baigent in our specialist food sector team to discuss your options.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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