When, some time ago, the finance director (FD) of a large company unilaterally decided to impose new payment terms on all their suppliers, Nick Wildgoose FCA FCIPS, supply chain risk management expert, who was working as Chief Procurement Officer at the time, tried to argue against it. Unfortunately, his warnings were ignored and the FD went ahead with his decision. As a result, the company lost several of their key suppliers in a very short space of time.

“Many said they would no longer work with us,” Wildgoose recalls. “In the end, the FD was forced to reverse his decision. But the damage was done. It takes a long time to build up trust, yet you can lose it overnight if something like this isn’t handled properly.”

This, says Wildgoose, demonstrates how important it is to maintain relationships, particularly with strategic suppliers. Ultimately, damaging supplier relationships could cost a company significantly more than the potential ‘interest advantage’ of paying late to protect working capital. “It’s also of critical importance that finance teams are aware of the increasing number of UK regulations around payments, such as The Procurement Act 2023,” he adds.

So, what can finance teams and in-house accountants do to improve their own relationships with their suppliers?

Cross-functional alignment

Critically, there needs to be ‘cross-functional alignment’ between finance, procurement and operations. A disconnect can lead to a lack of understanding – or recognition – around the relative importance of a supplier and an overall understanding of the relationship.

“If you’re going to start upsetting key suppliers by late payments, you’re not going to get the best service from them,” says Wildgoose. A joined-up approach is therefore essential within departments to ensure relevant staff are aware of the relative importance of each supplier and where necessary, to prioritise invoicing processing.

Maintain clear and transparent communication

Extending payment terms may improve working capital, but it can create financial stress among suppliers and push this pressure down the supply chain resulting in insolvencies, Wildgoose warns. 

He points to the Jaguar Land Rover (JLR) cyberattack last year, which inadvertently resulted in delayed and non-payment to suppliers because it was forced to temporarily stop production for several weeks. Fortunately, the government stepped in with a £1.5bn bailout loan to protect the small business suppliers from insolvency (affecting around 100,000 people working for supply chain firms, according to the BBC).

Although JLR didn’t strategically choose to delay payment – they were left with no choice following the attack – but the fallout and impact on suppliers was the same.

For situations where end-user companies have to extend payment terms, Wildgoose advises ensuring communication is ‘clear and transparent’, that they give plenty of notice and explains the ‘why’ behind the decision.

“It needs to be a company-wide, transparent process which involves all relevant functions which deal with suppliers,” says Wildgoose. “You’re changing a supplier’s contract, so you need to explain the reasoning behind it in the context of the overall contract.”

There needs to be a degree of emotional intelligence and people skills, too. “These soft skills are critical to the relationship and they shouldn’t be undervalued.”

Adopt flexible payment terms

Wildgoose advocates shorter-term contracts to benefit both parties, especially in volatile climates and at the start of a new supplier relationship.

“You should link shorter contract terms to KPIs and supplier performance,” he advises. “If a supplier is performing badly, it’s reason enough to hold back payment. It sends a strong message to the supplier’s CEO to up their game.”

Allowances in payment terms can also be made for seasonal trends, for example, toy supply chains in the lead-up to Christmas.

In essence, shorter contracts enable ‘elasticity’ in fast-changing market conditions, while seasonal adjustments to payment terms can help manage fluctuating cash needs on both sides. “So sometimes you’re helping fund a supplier with early payments and sometimes they’re helping you out. It’s a trade-off.”

Support supplier cash flow

Wildgoose suggests more leftfield initiatives to improve supplier relationships if the company has a strong balance sheet and is in a position to do so.

This includes entering into joint funding initiatives, where a business agrees to share the financial risk and/or investment because doing so may benefit them in the long-term, such as helping to improve the efficiency of a best-selling product by funding supplier innovation.

Alternatively, there are also a growing number of supply chain finance initiatives, such as Dynamic Discounting, where a business agrees to earlier payment terms in return for discounts.

Become a customer of choice

According to Wildgoose, companies with a bad payment reputation can easily become common knowledge which can damage business. “To avoid this, companies should think about how they become a ‘customer of choice’,” he says. “How? Once you’ve agreed those contract and payment terms, please just stick to them. At least you’re not souring the relationship.”