Uncategorised

Is it ethical to extend payment terms whilst you are making a profit?

The recession has been tough on all of us.

I have friends that have lost jobs, like many of you, no doubt.

My own business, Ethical Corporation, has been hit as much as any in the business services sector.

We had to make one redundancy, and haven’t replaced quite a few who have left.

We’ve curtailed our climate change publishing, (shortly to be re-invigorated as part of Ethical Corporation) and cut down the number of conferences that we hold.

We’ve all taken a hit, tiny or no pay rises and smaller bonuses, if any.

But even we, as a tiny company in the sea of multi-nationals, still pay our suppliers within 30 days.

Maybe once in a while an invoice goes awry and it’s 35 days or so, but our policy is always to pay on time, even when we had to borrow money in one quarter from our investors to pay the bills.

Which is why, capitalist though I am, I find it so hard to stomach the idea of profit-making companies lengthening supplier payment terms to maximise returns.

Aside from the ethics of it, it smacks to me of laziness.

It says: “rather than focusing on opportunity and innovation, let’s squeeze the supply base for a few drops more”.

Morally speaking, it’s just wrong. There’s no two ways about it.

Companies do it because of greed at the top, and because executives who have reached that level choose not to think about the impact their decisions can have, particularly on smaller companies.

We’ve criticised Tesco’s practices recently, for paying non-food suppliers on 60 day terms.

But some recent news on supplier payment terms is even more surprising.

Carlsberg, the Danish brewing brand with a prominent link to “CSR” on its website, is now taking up to 120 days to pay suppliers.

The official policy, confirmed, says the Forum of Private Business (FPB), by Carlsberg marketing director David Scott, is 95 days.

But if an invoice is issued “early in the month”, according the FPB, a small business lobby group, suppliers could wait 120 days to get paid, double that of Tesco’s suppliers.

Carlsberg announced pre-tax profits of £344 million for the second quarter of 2009.

The Forum of Private Business has a late payment “Hall of Shame” on its website.

You’d be surprised at the list of companies.

Others include Argos, InBev and Diageo.

All firms with stated responsible business policies and practices.

The UK Government, known more for squeezing small business itself over larger, more mobile firms, has even developed a Prompt Payment Code.

A lot of the banks have signed up for it.

Now what about the retailers and brewers?

Time for them to step up, if they want to be taken seriously on corporate responsibility.

2 Comments

  1. Christian Braun

    Here in Germany, it's normal for companies to respect the payment terms stipulated by or agreed with the supplier. The German for "payment practices" even hints at an ethical dimension to this: "Zahlungsmoral" (With "Zahlung" meaning payment).

    Thirty days is pretty good for the UK. But respecting payment terms as stipulated by the supplier and/or negotiated by purchaser and supplier before the transaction commences should be the norm for any company. As a supplier, I shouldn't have to worry about whether a client is not making a profit. If it won't be able to pay me according to my terms, it should warn me or should ask me to agree to its payment terms before the transaction commences.

    As for your question as to whether it is ethical for a company to extend payment terms if it is making a profit:

    If by "extend" you mean "ignore", it's as ethical as any breach of agreement can be. One party to an agreement can't just unilaterally change the terms of the agreement; it can either attempt to renegotiate them or it can ignore them. And even the "renegotiate" part is pretty dodgy when it comes to large purchasers if the reasons for wanting to pay late were present before the transaction commenced, as the supplier will have little choice but to agree to the new terms anyway if it wants future business from that customer. I've never understood why any company without cashflow problems would ever consciously ignore payment terms, though: It will simply make that company a less-preferred customer.

    But if by "extend" you mean "offer payments terms that are longer than the general standard", then there's nothing wrong with that. It sounds a bit short-sighted, though, as again it will make that company a less-preferred customer. Any vendor or service-provider with no choice but to supply on those terms would be best advised, I guess, to read and react to what would in effect be the writing on the wall.

  2. Christian Braun

    Following what I wrote in my comment above, here's the issue treated from the opposite direction (can a supplier offer longer payment terms as a competitive advantage?). The comments are also interesting:

    http://is.gd/2thu6

Comments are Closed

All rights reserved @ SustainableSmartBusiness

LinkedIn