Morrisons to Pay Small Suppliers Instantly

 

In a news release on 5th Jan 2021, retail giant Morrisons announced strong growth through the second half of 2020, consistent with the other supermarkets who have benefitted from people being at home more, not eating or drinking out and so-on. It also gave some interesting data on its prompt payment policy for small suppliers that is of obvious interest to us at MCC. 

Both Morrisons and Aldi instituted an immediate payment policy for small suppliers (defined as those that do £1m or less with them each year), and they are to be rightly applauded for this move. It recognises the fact that small companies are more likely to suffer the perturbations caused by Covid-19, and that the big companies need these small suppliers, so are worth supporting. This comes on the back of their announcement that they would repay all the business rates relief gifted by The Chancellor, in line with many other retailers who have benefitted from changes in spending behaviour over the last 10 months. Morrisons come across as a fair organisation that recognises its responsibilities go further than its bottom line and shareholder dividend.

Morrisons disclosure leads us to a likely cost of this. Morrisons attributed £60m of the growth in their net debt to the policy, so we can assume that this is the amount of credit they would normally be taking from these suppliers. It illustrates how the small suppliers are normally providing this level of working capital through their credit terms to a company that presumably has very little in the way of debtors to finance. At a guess, because we aren’t privy to their marginal cost of borrowing, this may cost them £2-3m a year to finance. That’s the value of the credit they are normally given and we’d suggest a low value compared to the cost to the small suppliers who normally furnish this.

The Morrisons release goes on to say that they expect this working capital increase to reverse in Q1, implying that they will be reverting to their pre-covid credit arrangements with their small suppliers. The CSR section in their annual report is extensive and paints a picture of an organisation that takes its broader responsibilities seriously, especially in the communities its serves. Pre-Covid, Morrisons policy was to pay the smallest suppliers, those doing less than £100k per year, in 14 days, which is an excellent way to behave. Those between £100k and £1m were paid in 30-60 days. It would be a huge feather in the cap for Morrisons if they were to cap their credit terms at 30 days for all small suppliers.

So we’ve had a glimpse into the cost and benefit associated with giving credit in business transactions. If you multiply these numbers up by the total number of B2B transactions and factor in that most small suppliers don’t get such good treatment as Morrisons give, you probably end up with a very large number indeed (that’s right, I haven’t bothered to do the sums). Credit is the oil that lubricates business being transacted, but if its abused then the machine runs poorly, or in the worst cases breaks down completely.

Are we just victims?

The issue of late payments is often characterised as a big vs small issue; namely big companies exploiting the weakness or naivety of small companies and hanging on to cash they should be handing out to their suppliers. I’m wondering though whether this is leading to a bit of victim culture in which us small players feel helpless and unable to affect our position. Is there another way of looking at it and is there something we could all do, with very little effort, to help ourselves?

Now notwithstanding the often punitive terms that are rife in certain industries, these aren’t my beef here though they are cynical to say the least, I’m just looking at getting compliance with the terms of payment that are agreed. I’m also not excusing systemic policies where a company actively pursues a programme of avoiding paying to terms; they deserve all the stick that comes their way.  Big guys are supposed to know how to behave and have responsibility to do so. But their systems, designed for their own benefit of course, are often inflexible and need understanding and compliance from suppliers if they are to deliver what the supplier wants ie: correct payment, on time, as promised.

Lets not assume also that its exclusively a big vs small issue here. Small companies are just as likely to shirk their obligations to pay when the pressures on their business are high, or they are just not very competent. 

Whatever the size ratio, there is stuff we can all do to minimise the chances of the other party hanging onto to money that is rightly ours. Its not rocket science, just requires some understanding and diligence, but once its in place it becomes a habit and in most cases you may end up being respected for your professionalism and have your reputation enhanced.

The experts at MCC have encapsulated a lot of this knowledge into a short email-course of bite-size chunks that you can always find time to read and digest in your hectic day. Sign up and just become better at business rather than a victim.

1. The Importance of Good Credit Control
2. Giving Credit is Optional - how much should you give?
3. Are Your Invoices up to Scratch? - your invoice can help get you paid
4. Best Practice to Get Paid on Time - offering strategies to ensure customers pay you
5. Applying Interest and Compensation to Overdue Invoices - your statutory right
6. What to do if a Customer Goes into Administration
7. How to Spot a Bad Debt Before it Happens

Despite all the things you can do to become a payments expert, if it still doesn’t work you can always get MCC to do it for you, and often at no cost to you. Click here to find out how.

Debt insurance claims rise

We’re always banging on about just how much money is owed to SMEs by late payers, but forgive us, as sorting it out is what we do and we are committed to helping to deal with the situation. The latest study by Previse, a Fintech business aimed at expediting prompt payment by large buyers, reckons that SMEs have had to take out £31.5 billion in funding to bridge the late payment gap. One in five companies are waiting more than 90 days for their bill to be settled and ¾ of them have had their company compromised because of late payment. This late payment culture is killing the competitiveness of UK business. It would be naive to think that extending terms with a supplier comes at zero cost. Prices will go up, suppliers will look elsewhere, the relationship gets soured and that benefits neither party. But as we stand, that’s the culture in many companies in the UK.

For those companies that can afford it, insuring yourself against this kind of sharp-practice and the risk that it leads to default is one way forward. But even that is now beginning to get harder and inevitably more expensive. The Association of British Insurers (ABI) have just reported that 2017 has had the largest number of pay-outs since the crash of 2009, a whopping £225 million. If you can’t get insurance for your customers credit risk or its just too expensive, then it will drive decision making and the ‘friction’ of doing business in only one direction. That has to be a bad thing for UK plc.

Against this background, it surely adds even more weight to putting these ‘sticky’ debts into the hands of professionals. If you don’t want to pay the insurers rates, or won’t even be considered by them, then as soon as a debt becomes due, even one day over term, pass it to a body like us to quickly and efficiently get your money for you. Its very cost effective, or even cost neutral, and the sooner we are engaged, the quicker you get your money, and the risks to your business are minimised.

Extreme Debt Collection Methods

Some trainee debt collectors in action

I’m sure there are many pre-conceptions about how debt collectors work, or how an effective credit controller goes about making sure that payments come in on time. However, I can say with total conviction that the tactics employed by a group of unofficial money-lenders in China are not part of the MCC portfolio.

It was reported in The Telegraph, the FT, The Sun and a few other places, that some rogue money-lenders had hired older ladies from outdoor dancing classes who then used highly intimidating tactics to get borrowers to pay up. Several of them have been jailed for doing things like shouting through a megaphone outside the debtors house to humiliate them in front of their neighbours, carrying out beatings, or even stripping naked in front of the debtor in the street and implying a sexual assault had taken place. Though Chinese authorities eventually caught up with this gang, imprisoning many of them for long sentences, here in the UK the law is very strict on personal and company debt as we’ve written about before.

When pursuing overdue debts, here at MCC we recognise that we are bringing a contractual obligation by a customer back on track after its gone awry. The tactics will therefore be polite, unemotional and business-like, but with a clearly articulated end-game where the debt is paid off to our client’s satisfaction. The outcome is not in doubt, we are just determining how we are going to get there. So far, shouting in the street, violence, or taking your clothes have not been necessary for us to collect millions for our clients. I, for one, am very pleased about that.