How are Payables Trends Affecting Your Distribution Business?
Payables is a give and take, a compromise between your business and your suppliers. So how do you achieve harmony
Are you taking longer to pay your suppliers in the last year or two? Have you asked your suppliers for extended credit terms and payment periods?
Obviously, when you take longer to pay your suppliers it improves your cash flow position. But it decreases your supplier’s cash flow and it may cause them to raise their rates that you pay in order to compensate for the low or slow cash flow.
Unfortunately, as a distributor you must maintain your ability to order and maintain inventory levels, pay warehouse staff and arrange for transportation services.
Factors influencing these trends definitely differ by industry and the region in the country where you operate. A recent study referenced by Supply Chain Digest found that the days of payables outstanding is actually about a day lower than it was 10 years ago. The Days Payables Outstanding (DPO) on average has varied between 28 and 33.5 days over the period from 2003 to 2013.
The variation between industries is large with Medical Devices at the low end of 18 days to the high end for retail auto and truck parts at over 82 days.
As a distributor you need to be aware that your supplier may want to use your invoices as collateral to improve their cash flow thru factoring. Factoring can be used instead of obtaining a business loan for accounts receivable balances or via purchase order financing.
The definition of factoring is receiving lending from a third party based on the value and quality of outstanding invoices. This type of funding uses your credit worthiness as collateral for the loan to the supplier. Factoring lenders will pay the supplier in advance while they hold the invoices until you (the distributor) pay the invoice. The lender is paid interest by the supplier and settles the final transaction.
Factoring is also available to distributors and manufacturers experiencing cash flow limitations. This site provides reviews of factoring services.
Look into your accounting system for your own DPO metrics and review the suppliers you use which might be at risk. Often new companies or ones who are growing rapidly are the most at risk for cash flow issues.
Take the time for a quick review of how you are managing and working with your suppliers. Often what is in your business best interest is good communication and cooperation with both customers and suppliers.
If you need better information to track your suppliers and their invoices, please contact Socius for a review of what their Distribution 20/20 platform can do.
