The government and companies in dominant positions pay their bills too late… structurally.

2011; it is the time of austerity. Austerity is key; any time, any place, anywhere. Most companies and many departments of national and local governments become more austere by cutting costs and by reducing unnecessary expenses and squandering of money. This is a good development, as companies should be frugal to remain competitive and the government should not waste taxpayers’ money.

But unfortunately the government and strong companies in dominant positions know another way of saving lots of euro´s. They do this by paying their suppliers´ invoices very late and often even much too late, thus saving literally millions of euro´s in short-term liquidity.

Especially the governments that obviously have an example function, violate the rules of doing business fair and square. They do this by delaying their payments from the usual 30 days to 60 days or longer. In spite of official promises of ministers and chief officials to change this disturbing behavior, things got rather worse than better during the last year.

That this kind of practice is not exclusively for the governments, becomes clear in the following article of Business News Radio station BNR (www.bnr.nl)

Multinationals make use of their dominant position (link in Dutch)

More and more large corporations like KPN Telecom, Heineken and Unilever lengthen unilaterally their terms of payment from 30 days to 60 days. On top of that, the new, ´agreed´ terms of payment are violated too.

´Small and medium business hardly dare to say no´, according to Peter Kramer of the Association of Credit Management Companies.

´When everybody would pay within 30 days, this would yield extra employment for 26,000 people. Companies would have an improved cash position of €15 bln´, according to Peter Kramer in an interview with BNR. And this is not the only advantage. ´Companies can invest earlier and have a lower interest burden. It is clearly a substantial positive result, when companies would pay earlier´.

The dominant position of multinationals makes that smaller businesses hardly dare to say no against the payment terms carried through unilaterally. Kramer explains: ´It is the commercial dependency on that large firm and the fear of losing valuable sales´.

Especially small and medium enterprises are struck by what he calls ´a new trend among the large companies´. Kramer: ´we ascertained that large companies more and more often extend payment terms unilaterally until 120 days. That is 90 days after the usual invoice due date. There are too few companies that protest and don´t accept it without blinking. Small companies are not in a position to just say no.

One party´s pain is the other party´s gain. It is a big problem for small companies, although I really doubt the mentioned figure of €15 bln and the 26,000 jobs that would be at stake. The €15 bln is unfounded and seems just a too large figure to be realistic. Besides that, the 26,000 jobs that would be lost due to this behavior are in my opinion compensated by extra jobs at the large companies and the government, due to realized savings.

But let there be no doubt: this is a form of legalized robbery and unfortunately it´s becoming more and more common practice in these austere times. This behavior might choke small, cash-strapped businesses to death or at least forces suppliers to keep much higher liquidity reserves than otherwise necessary. Therefore this is really bad behavior.

And sometimes large companies make it even worse by using a form of extortion: one large bank in The Netherlands, after being taken over, sent a letter to its suppliers of facility services with the request ‘to pay back 10% of last year’s sales, or else…’. A large Dutch company in paints and chemicals ´asked´ for a 10% discount from its largest suppliers. Most suppliers don’t want to lose such important customers and reward this kind of jawboning.

Already in 1990, when I worked as an accountancy trainee at an importer of luxurious hifi equipment in The Netherlands, it was common practice at the ‘best of breed’ department stores and hifi shops to pay their bills too late.

Not knowing of this habit, I called two of the biggest customers of my company: I reminded them that some invoices should have been paid earlier and that it was not allowed to deduct the discount for cash payment, when an invoice was only paid after 90 days. On hearing me making my phone calls, the chief accountant stated: ‘Don’t do that. These are our best customers. Losing them would be a disaster. And they do this all the time’.

Although my career as accountant-apprentice would end soon (not due to this incident, by the way), the memory remained: if you´re big, strong and powerful, you can do things that smaller companies can´t do, and that are not fair and could even be considered dishonest. That was a cynical, but valuable lesson.

And now 21 years later nothing has changed and things presumably are only getting worse. But is this a fair way of doing business? No, it isn´t.