Delays in payment, an ever-present problem that affects supplier credit
Since 2009, the famous LME law (law for the modernization of the economy) has strictly limited the contractual payment terms between companies. These terms must not exceed 60 days from the date of the invoice, or 45 days from the end of the month (Article L. 441-10 of the Commercial Code). However, late payments are still numerous. They are detrimental to the profitability of companies and negatively impact their cash flow and competitiveness. In the worst case, they can weaken the existence of the most vulnerable companies. So, be careful with your supplier credit, because in addition to weakening your company, it can also be sanctioned.
Punitive regulations
Article L. 441-16 of the French Commercial Code provides for the sanctioning of non-compliance with legal rules on payment deadlines by an administrative fine of up to 75,000 euros for an individual and 2 million euros for a legal entity.
This sanction is published .In addition, the fine is doubled if the breach is repeated within two years of the date on which the first penalty decision became final.
Name and Shame" in action
The General Directorate for Competition, Consumer Affairs and Fraud Control, which is responsible for monitoring compliance with the rules of the Commercial Code relating to payment periods, issued 377 administrative fines in 2018 out of 2,700 inspections. 98 of these decisions were published on the DGCCRF website.
All companies are concerned, the fines vary from €2,000 for a small SME in Burgundy to €3.7 million for a large French telephone operator and some are published on https://www.economie.gouv.fr/dgccrf/sanctions-delais-paiement.
Cash flow monitoring, an essential part of good supplier credit management
However, monitoring cash flows, including supplier payments, is essential for good risk management.
As a reminder, the ability to generate operating cash flow results from the following simple formula:
Cash flow + change in WCR - investment.
Some indicators to follow
For a good follow-up of these financial risks, I think that a company must follow and pilot 4 or 5 essential indicators:
EBITDA or earnings before interest, taxes, depreciation, and amortization (EBITDA). That is to say, the ability to make an operating and monetary margin without taking into account financial interests or corporate taxes. This major KPI can be broken down by business line, establishment, region, customer type, etc.
The cash flow or self-financing capacity, which is the result of the calculation: net income - non-cashable income (write-back of depreciation and provisions) + non-cashable expenses, which gives us the internal resources generated by the company that enable it to ensure its financing.
Cash flow and EBITDA are two KPI on which the company can and must act. Evolution of the turnover & control of the expenses = Profitability.
The working capital requirement ( WCR ) is the measure of the financial resources that a company must use to cover the financial needs resulting from the cash flow differences related to its activity.
The two main components for monitoring WCR are DSO and DPO.
TheDSO(days sales outstanding) analyzes the payment behavior of its customers. We talk about contractual payment terms (difference between invoice date and due date) and payment after due dates.
DSO management has three components. The customer's ability to honor these debts, the customer's credit to the customer in terms of days, and the customer's own ability to follow up on overdue invoices and avoid disputes.
The supplier payment delay "DRF "or "DPO" (Days Payable Outstanding) analyzes its payment behavior towards its suppliers. This is where the state was forced to legislate and sanction, to punish bad payers and surely regulate the balance of power between the "small" and "big".
What does this mean?
But is it good management to manage your cash flow by paying your suppliers late rather than on the date agreed in the contract?
On this subject and in view of the very low bank interest rates, should we not rethink our way of negotiating schedules? Should we base our schedules on our own financial capacity and that of our partners, rather than on a power struggle? Paying late to a supplier who will have recourse to factoring will increase the cost of the product and therefore the price!
In conclusion
Managing your cash is not that difficult, you just have to :
Be able to generate margin. Make your customers pay on time. Manage your credit policy well. To avoid unpaid bills. Pay your debts on time and avoid fines and penalties. Invest wisely. Motivate the teams who work constantly and without always knowing it to achieve it.
In the future, I think we will have to add an extra layer, to talk and analyze cash in a more ethical way. It's a good way to give meaning to the company and its employees, and to make its customers grow, its suppliers feel good, and all the stakeholders of the company feel good about our good old planet.
