Sarah is a sales & marketing content writer, with ten years of experience within the engineering & manufacturing industry. Working both at Qimtek and on a freelance basis, she can usually be found hammering away at a keyboard or with her head in a pile of engineering drawings.
There's no getting around the fact that owning and running a smaller engineering firm comes with its fair share of challenges. As many SMEs have less resources and less money than larger companies, unforeseen issues can cause a greater knock-on effect which cannot be so easily absorbed by the business. Cash flow has always been a challenge for smaller companies, but do larger businesses stoke the fires by imposing unfair payment terms?
Longer Payment Terms & SMEs:
It's not uncommon for larger manufacturers to impose payment terms of 60, 90, or even 120 days on their suppliers.
Of course, the issue of cash flow amongst SMEs is no way exclusive to the engineering & manufacturing industries; however, since engineers and manufacturers require a physical premises, materials and other resources/overheads to complete a job successfully, it's easy to see how these issues have the potential to stop a business in its tracks.
Whilst many smaller businesses may enjoy the kudos and status of working for some of the larger names within the manufacturing industry, some (but not all) of the bigger OEMs use this to their advantage. It's not uncommon for larger manufacturers to impose payment terms of 60, 90, or even 120 days on their suppliers, simply because their reputation means that there will always be suppliers who will accept these terms to their detriment. Meanwhile, this leaves their suppliers struggling to pay their own bills while they wait for payment to arrive.
Despite the terms dictated by their customers, SME suppliers will nonetheless be required to pay their own bills within 30 days, not to mention staff wages. The resulting disparity between required funds and cash in the bank can leave many smaller businesses struggling to stay afloat through no fault of their own. Compounding this is the cutthroat nature of their larger customers; suppliers simply cannot afford to question the terms imposed upon them, lest they be replaced and lose the business entirely.
READ: Cost-Saving Tips For Manufacturers
The Human Touch:
The ruthless terms imposed by some OEMs set suppliers up to fail from the start.
By holding their suppliers to ransom, large OEMs maintain a firm grasp on their supply chain, with terms that serve only to benefit themselves. With an unwillingness to apply a degree of flexibility to accommodate their smaller suppliers, there have been many SMEs who were unable to make ends meet in the interim period between project completion and payment. This scenario has seen many smaller engineering businesses shut their doors for good amidst a halt in cash flow, which could easily be avoided if all companies adopted 30 day terms.
Whilst companies of all sizes should be careful when it comes to cash flow and finances, the ruthless terms imposed by some OEMs set suppliers up to fail from the start. Instead of helping to build a mutually-beneficial business relationship, longer payment terms serve only to protect the interests of the customer, completely discounting the needs of smaller suppliers who are far more sensitive to cash flow issues. A 'business only' approach puts smaller companies - and ultimately, peoples' livelihoods - at risk of extinction. Instead, it should be remembered that behind every business are human employees, each with their own bills to pay and families to feed.
READ: Cash Is King - A Guide To Effective Cash Collection
What Can Be Done?
Smaller companies need to be fully aware of the risks to their business if they are not receiving prompt payment for their services.
Short of 30 day payment terms becoming a legal requirement, suppliers need to be especially wary about entering into a business arrangement with customers who insist on implementing longer-than-average payment terms. Whilst the enhanced reputation that comes with working for a household name can be a real boost for SMEs as they try to grow, smaller companies need to be fully aware of the risks to their business if they are not receiving prompt payment for their services.
In the meantime, the prominence of this issue is continuing to gain momentum, sparking hope that extended payment terms will someday become a thing of the past. Campaigns to end unfair payment terms overseas have seen some success; in November 2020, the South African #Payin30 initiative was successful in getting CEOs of larger companies to commit to paying all of their suppliers within 30 days.
Here in the UK, a similar initiative is working hard to bring about similar change. #PayIn30Days - spearheaded by Tony Robinson OBE - is dedicated to creating fairer terms for small businesses, enabling them to thrive instead of simply trying to survive. With a growing list of companies showing their support to #PayIn30Days, it is hoped that the UK's business community will eventually adopt a similar approach to that of its South African counterparts.
READ: R&D Tax Credits - The Facts
Conclusion:
Within the world of business, it can be easy to overlook the bigger picture when it comes to the implications of late payments, but it is vital that we remember to stay human. Late payment terms - or terms that exist purely in the buyer's benefit - can have devastating effects on suppliers and ultimately, put them out of business.
If more OEMs were to adopt 30 day payment terms, then businesses of all sizes would benefit from a fairer system that doesn't hinder those who are most vulnerable to cash flow issues. As it currently stands, the kudos of working with larger companies can indeed come at a price - sometimes more than some businesses can afford.