Aside from contractual and legal compliance issues, purchasers and suppliers are often jointly responsible for late payments. How can this be remedied?
What the law says
In 2013, Belgium transposed into law a European directive on late payments in commercial transactions. The reformed law had two aims: to end excessively long payment periods and impose sanctions on poor payers.
Since then, if the payment period is not set in the contract, the invoice must be paid 30 calendar days after receipt of the invoice by the debtor or receipt of the merchandise or services. If this payment is not made, the interest rate that applies is equal to the key interest rate plus 8 percentage points, including for commercial transactions with public authorities.
"B2B: the standard payment
deadline is 30 days."
The issue is that although there has been an overall improvement in Europe since the directive was transposed, in particular in comparison with the English-speaking world, the coercive measures in place are still too weak and there are not enough controls. For want of dissuasive measures, we will continue to come across significant payment delays.
Sometimes there are objective reasons to explain these long periods, in particular when complex information is required from the supplier to be placed on the invoice, which can turn into a bit of a nightmare for some accounting departments. The next issue is shared responsibility.
Delays in invoicing stem from two causes. The first issue is a strategic one. With the aim of conquering parts of the market, a company can choose not to meet payment deadlines. From an operational standpoint, a lack of organisation can lead to a company not always meeting regulatory requirements correctly, which translates into incorrect invoices or invoices being paid late.
What are the solutions?
- Digitisation of invoices. This makes validating invoices quicker and reduces processing times.
- A reduction of the time between the performance of a service (or sale) and issue of the invoice.
- Better client risk management, in particular by consulting the databases for information to anticipate certain clients' defaults. If the risk is particularly high, a reverse factoring operation may be required.
The art of negotiating payment terms with suppliers
Cash management is an SME's frontline weapon, and payment terms are a key means of keeping it under control – providing companies proactively open negotiations with their suppliers. But this solution remains underutilised by entrepreneurs
Cash flow difficulties are the number one cause of company bankruptcy in Belgium. Business owners face a constant battle to stay in control and maintain the balance of their inflows and outflows. Negotiating payment terms is one of the levers that can be employed: shortening them for customers while extending them for suppliers. In Belgium, the statutory deadline between companies is 30 days. Yet the reality can be different, since either trading partner may deviate from the rule. Where one of the parties is in a dominant position, the other is often obliged to accept the conditions it imposes... meaning its payment term becomes longer. Everything is negotiable, however, even with "big" suppliers, as long as you formalise the situation and ensure you protect your business relationship.
Who is your supplier?
They say information is power, and there is some truth in this. Indeed, the more you know about your "opponent", the more you will be able to turn the tables. How are the company's finances, and what is its cash position? Is it experiencing difficulties? Where is it placed on the market, particularly in relation to its competitors? What is your dependency ratio in relation to this partner? How does it make payments, and what is its purchase history? The answers to these questions will allow you to take up better positions in the negotiations, and find the best angle to launch an attack that catches the other side by surprise. Specialised websites, data banks, word of mouth (the competition): all means are justified in order to find out more!
What do you want to gain?
And a resulting question: what are you willing to put on the table to achieve your objective? In other words, you need to be properly prepared and establish a strategy regarding what you are willing to concede (and how much this will cost you) and what you absolutely want to gain in return. Remember that the other party has presumably not requested anything, and potentially has little to gain. Therefore, you cannot arrive empty-handed. Are you willing to order larger volumes in order to extend your payment terms? Can you envisage a long-term contractual commitment? Could you contemplate paying more in return for spreading your debits further? Imagine you are playing poker: clearly, you should keep your cards close to your chest. Wait for the right time to show your negotiating partner that you are prepared to make concessions.
How can you negotiate successfully?
The art of negotiating is a difficult skill. However well prepared you are, keep the following principles in mind:
- Even if you have brought a proposal to the table, listen to the other side and pay attention to detail so that you can react quickly.
- Do not be frightened of bearing your teeth a little, even if you are concerned about spoiling the business relationship with your supplier. Stand your ground and mention what the competition can offer you, for example.
- You must control how you communicate, so that you avoid giving the impression that you have cash management problems. Emphasise that payment delays do not help anyone, and that it would be better to agree on a reasonable and sustainable schedule.
- If your business relationship is established, mention your positive partnership and your desire to see this continue.
- During discussions, regularly refer to how far you have come and your shared progress to date. This positive tone will be well received.
- If the negotiations stall, try to resolve the difficulty by pulling out a trump card, for example (i.e. a concession).
- Remember: a good agreement is balanced, and leaves neither party feeling wronged. So do not be too greedy: the outcome must be worthwhile.
- Are you happy with the situation? Move to finalise the deal, either by accepting what is on offer or by finally opting for a fair compromise.
How to automatically get the best exchange rate
Companies working with several currencies often want to avoid exchange rate risks and administrative hassle. That is why the bank has come up with a behind-the-scenes solution: the 'embedded FX' service.
Embedded FX? You don't even need to remember the name, because the system works automatically, without you even having to think about it. FX doesn't stand for Hollywood-style special effects, but for Foreign Exchange, sometimes referred to as Cross Currency. You are guaranteed to come across this at some point if you make international payments, since they are not always executed in the currency of the debit account (referred to as 'mono-currency payments'). Sometimes, the currencies of the accounts the payment is being debited from or credited to may not be the same. These are FX payments. During such payments, an exchange takes place: one currency is sold and another bought, without you having to lift a finger.
The volumes on the FX market might be greater than you'd think. To put it plainly: they are enormous. Every day, more than 5 trillion American dollars are traded. That is 5000 billion American dollars, more than the volume involved in global equities trading...in a single day. The FX market operates day and night, and only closes over the weekend from 10 pm on Friday until 10 pm on Sunday.
Wim Grosemans (Head of Product Management Payments and Receivables at the BNP Paribas Cash Management Competence Center):
'On the FX market, banks essentially play the role of a wholesaler: they buy and sell currencies on the international market, and then sell them on to the customer with a mark-up. BNP Paribas is one of the biggest players, ranking among the global top ten. There is no official market rate in this over-the-counter market. Each bank determines the rate at which it wants to buy and sell currencies itself. Unofficial market rates can be found in publications from a number of public institutions (such as the European Central Bank) and private organisations (Reuters, Bloomberg etc.). These are based on the average rate offered by a number of major banks.'
The rate is always determined per currency pair, for example the euro versus the American dollar: EUR/USD = 1.1119. The most traded pair is EUR/USD, which represents 25% of daily trade. Second on the list is the pair American dollar/Japanese yen
(USD/JPY) with 18%, with British pound/American dollar (GBP/USD) coming in third at 9%.
Alwin Vande Loock (Product Marketing Manager Payments and Receivables at the BNP Paribas Cash Management Competence Center):
'As for the rate, banks offer a number of options. The rate can be a live market rate that is continuously being updated. The EUR/USD rate, for example, is adjusted more than 50 times per second. Another option is a daily rate. In this case, a rate is offered that will apply for a certain period.'
For many companies, all of this hassle with exchange rates is a real headache. Too complex, too expensive in terms of administrative costs and too many exchange rate risks. For those customers, banks have a solution: embedded FX.
Wim Grosemans (Head of Product Management Payments and Receivables at the BNP Paribas Cash Management Competence Center):
'When you make a payment in a currency you do not hold an account in, the bank will immediately retrieve a good exchange rate from its colleagues in the dealing room of the Global Markets department. The rate is usually confirmed within one hour after the customer has sent the payment. Unless large amounts are being transferred, the entire process is automatic. The IT systems used are much more efficient than they were just a few years ago, meaning that the bank is less exposed to volatility and can offer its customers a competitive rate. Embedded FX is an efficient and simple alternative for anyone who doesn't want to hold accounts in different currencies and run the exchange rate risks that entails. For the customer, it no longer matters what currency they use: the process is exactly the same. What's more, it gives them peace of mind, because they know that they'll always get a great rate.'
Working capital: far more than just an accounting term
Working capital, also known as net operating capital, presents a picture of the operational liquidity of a business. But there is more to it than meets the eye.
The success of a business actually depends to a significant extent on how it deals with its working capital needs.
The difference between working capital and working capital needs
Within the financial analysis, working capital is just one of the indicators that present a picture of the operational liquidity of a business. It not only affects general management, but also the access to bank credit or the valuation of the business, for example. This is calculated as follows:
Equity capital and other resources in the long term - fixed assets
This allows you to see whether sufficient long-term funds are available to finance the production chain. Where there is a positive result that is indeed the case, whereas with a negative result it is actually the production chain that must safeguard the long-term financing.
It is therefore useful to calculate the working capital needs as well:
Current assets (excluding cash) - current liabilities (excluding financial liabilities)
The result shows the amount the business needs in order to finance its production chain, and may be both positive and negative:
- where working capital needs are positive, the commercial debts no longer cover the short-term assets (excluding the financial). In that case, a business can rely on its working capital. If this is insufficient, it will need additional financing for its operational cycle in the short term;
- where working capital needs are negative, a business can meet its short-term liabilities without any problem. Nevertheless, it is advisable to reduce working capital needs (further).
In short, working capital presents a picture of the operational liquidity of a business, whereas working capital needs represent the amount the business needs in order to finance its production chain.
In other words, it boils down to limiting working capital needs as far as possible, thus increasing liquidity. This is crucial, especially in times of economic or financial difficulty. After all, customers tend to pay later then, while your stocks are increasing and your suppliers are imposing stricter payment terms. As a result, more and more working capital gets 'frozen' in your operating cycle, precisely when circumstances make it more difficult to attract additional financing.
Optimising working capital is not only a question of long-term considerations. In the short term, too, the business can release cash that is not being used optimally, or is being used unnecessarily, more specifically in the purchasing, production and sales processes within the operating cycle.
The working capital and the working capital needs must, above all, be geared effectively to each other. The working capital needs must be structurally less than the working capital itself, preferably with an extra buffer. However, there is no mathematical truth regarding the amount of working capital and working capital needs. Sector, activity and business model can affect this, for example.
The war of the buttons: MasterCard and Visa stand up to PayPal
The battle is on to become the dominant payment method of the future. PayPal may be the dominant force in the online payment sector, but the two giants – Visa and MasterCard – plan to break its stranglehold by joining forces.
Shopping online has never been easier for consumers, who can make their internet purchases in just a few clicks. Yet they are always looking for more: more speed, flexibility and mobility... they have more demands than ever! The industry players, led by PayPal, are all too aware of this reality: the US provider has become the leading online payment service by simplifying the pathway for web customers. So how did it do it? Aside from its money transfer services, the Palo Alto heavyweight offers its customers a "one-click" checkout service by gathering users' banking information in advance and storing it in their accounts (in a so-called digital wallet).
PayPal's payment shortcut has attracted envy, especially at Visa in San Francisco and MasterCard in the village of Purchase in New York state. And with good reason, since the two "oldies" had also launched their own payment solutions: Visa Checkout in 2014 and Masterpass in 2012. One can only conclude that these digital wallets have not been able to topple PayPal from its perch. But although they are in competition in various segments, the world's two largest credit card networks will surely hit back.
A few clicks make all the difference
You will have understood that the battleground is e-commerce, and the principal weapon is the single button that allows customers to check out. It is this button that means the customer no longer needs to leave the sofa to find their wallet or enter their details for the umpteenth time, and can now skip the various confirmation stages. According to information obtained by the financial website Bloomberg.com, Visa and MasterCard plan to join up with American Express and Discover to launch their own shared button, in a combined show of strength intended to counteract PayPal's dominance.
"Strength in unity", says the well-known Belgian motto. But PayPal is one step ahead in this case, it must be said. According to a recent survey (caveat: it was partly funded by the Palo Alto company), almost 58% of US retailers accept PayPal's technology, whereas only 36% of them offer their customers the option of Visa Checkout and just 16% offer Masterpass.
The one-button concept
PayPal may have pioneered this niche, but the alliance formed by these four companies to produce a shared technology heralds a united front, not forgetting other market forces (Android Pay, Apple Pay, Amazon, etc.) and the arrival of cryptocurrencies as a payment solution. In any event, the new one-button checkout process resulting from the merger of Visa Checkout and Masterpass looks set to be unveiled in 2019. The objective remains to offer customers a faster and more efficient online purchasing experience. But to achieve this, Visa and MasterCard must firstly convince retailers to offer it, and then work in tandem with the World Wide Web Consortium, which sets standards for internet browsers.
Though the new digital wallet is yet to be given a name, among the advantages it should offer is greater security, based on the token technology used by the two credit card giants. This has two benefits for customers: instead of using the bank card number, a unique ID is created for each transaction; secondly, data can be kept up to date more easily. The online payment turf war promises to be fierce!