Managing your cash is good, but be careful with the credit supplier!

Timeliness of payment, a problem still present that affects the supplier credit

Since 2009, the so-called LME (Modernisation of the Economy Act) has strictly capped inter-company contractual payment deadlines. These deadlines must not exceed 60 days from the date of the invoice, or 45 days end of months (Article L. 441-10 of the Commercial Code). However, delays in payment remain numerous. They are detrimental to the profitability of companies and negatively impact their cash flow, their competitiveness. In the worst cases, they can weaken the existence of the most vulnerable companies. So, beware of your supplier credit, because in addition to weakening your business, it can also be sanctioned.

 

A punitive regulation

Article L. 441-16 of the Commercial Code provides for the sanction of non-compliance with the legal rules on payment deadlines by an administrative fine of up to 75 000 euros for a natural person and 2 million euros for a legal person.

This penalty shall be published. In addition, the fine shall be doubled if the infringement is repeated within two years of the date on which the first sanction decision became final.

 

The ” Name and Shame ” in action

The Directorate-General for Competition, Consumer Affairs and the Suppression of Frauds responsible for monitoring compliance with the rules of the Commercial Code relating to payment deadlines issued in 2018, 377 administrative fines out of 2,700 checks. 98 of these decisions were published on the DGCCRF website.

All companies are affected, fines vary from €2,000 for a small SME Bourguignonne to €3.7 million for a large French telephone operator and some are published on https://www.economie.gouv.fr/dgccrf/sanctions-delay-payment.

 

Monitoring cash flows, an indispensable for the proper management of the credit supplier

However, the monitoring of cash flows, of which supplier regulations are part, is essential for sound risk management.

Pour rappel, la capacité à faire du cash opérationnel résulte de la formule simple suivante :

CAF + change in WCR – investment.

 

Some indicators to follow

For a good follow-up of these financial risks, I think that a company must follow and guide 4 or 5 essential indicators:

The EBITDA or learnings before interest, taxes, depreciation, and depreciation (EBITDA) or profit before interest, taxes, depreciation and depreciation (BAIIDA in French). That is the ability to make operational and monetary margin without taking into account financial interests or corporate tax. This major KPI may be declined by trade, establishment, region, type of customer, etc.

The CAF or self-financing capacity, which results from the calculation: net result – non-receivable revenues (recovery on depreciation and provision) + non-disbursable expenses which gives us the internal resources generated by the company that enable it to secure its financing.

The CAF and EBITDA are two KPIs on which the company can and must act. Evolution of turnover & expense management = Profitability.

The requirement for WCR (working capital requirement) is the measure of the financial resources that a company must implement to cover the financial need resulting from the cash flow offsets associated with its business.

The two main monitoring components of the WCR are the DSO and the DPO.

The customer settlement period or “DSO” (days sales outstanding) analyses the payment behaviour of its customers. It is referred to as the contractual settlement period (difference between invoice date and due date) and then settlement after due dates.

The management of the DSO has three components: the customer’s ability to honour these debts, the customer’s credit in a number of days, and his/her own ability to restart the overdue invoices and avoid litigation.

The “DRF” or “DPO” supplier settlement deadline (Days Payable Outstanding) analyses its payment behaviour vis-à-vis its suppliers. It is from this that the state was obliged to legislate and sanction, to punish the wrong payers and surely regulate the balance of power between the “small” and “big”.

 

What can be deduced from it?

But is it good management to manage its cash by late paying its suppliers rather than paying them on the date agreed to in the contract?

In this respect and in view of the very low bank interest rates, should we not rethink how we negotiate the schedules? Like setting its schedules on its own financial capacity and that of its partners and no longer on a balance of power? Lately paying a supplier who will resort to factoring will increase the cost of the product and therefore the price!

 

In conclusion

Managing your cash isn’t that hard, you just have to:

Be able to clear the margin. Make your customers pay in time. Manage your credit policy well. Don’t have any unpaid debts. Pay your debts in time by avoiding fines and penalties. Invest wisely. Motivate the teams that work tirelessly and without always knowing how to achieve it.

In the future, I think we will have to put an extra layer, to talk and analyse the cash in a more ethical way. It is a good way to give meaning to the company and its employees and to grow its customers, strengthen its suppliers and value all the company’s stakeholders while being supportive of our good old planet.