Payment terms: Protect your company's reputation

Payment terms
July 1st, 2021
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At the start of the first lockdown, a payment terms crisis committee[i] was set up to ensure compliance with good inter-company practices. Most recently, the crisis committee has focused on identifying inappropriate behaviour relating to payment terms.

In doing so, it has enabled procurement departments to make players in the approval and payment chain aware of the behaviours that they should avoid. To prevent a potential deviation from payment terms, two measures must be taken:

Four unacceptable practices relating to payment terms

Inter-company solidarity is essential to ensure that the economy as a whole functions properly — especially in times of economic uncertainty. Seen in this light, payment terms are a key issue, which is why the payment terms crisis committee was established.

In particular, the committee criticises engagement in four damaging behaviours:

  • Systematically delaying the issuance of purchase orders
  • Maintaining an unnecessarily complicated and confusing system for submitting invoices 
  • Employing an excessively long invoice-approval workflow
  • Blocking invoice payments on false grounds

The transition to remote working and the disruption of services during the first lockdown can certainly explain some administrative difficulties. Therefore, the idea is not to over-react to the slightest delay, but rather to call out any planned, intentional deviation from payment terms wherever possible.

Furthermore, the committee does not intend to prohibit any justified challenges to payment terms. Suppliers' invoices are not always of sufficient quality, and it is the role of procurement departments to ensure that contracts are executed to the letter. However, an unfounded challenge that extends payment terms unjustifiably damages the relationship of trust. 

A proactive approach to complying with payment terms

The first good practice to be implemented by procurement departments is, of course, to establish clear rules regarding payment terms:

  • Ensure that the payment terms—which cannot legally exceed 60 days—are systematically stated in the contract
  • Indicate in the contract the way in which these payment terms will be applied, in particular stating the point at which the term begins (i.e. the date on which the invoice is received)
  • Establish a way of tracking due dates on a day-to-day basis, for example using the procure-to-pay process
  • Include a reminder of the rules on the purchase order to ensure that everyone understands their obligations

Secondly, it is essential to work closely with suppliers in order to make them aware of their responsibilities when it comes to the quality of their invoices:  

  • Ensure that any formal rules (e.g. regarding recipient, invoice layout, inclusion of an order reference etc.) are strictly complied with by pointing out that it is in the supplier's interest to facilitate the reconciliation of invoices and orders
  • Ensure that invoices are issued within a reasonable period following acceptance of the delivery

Finally, to eliminate the risk of exceeding payment terms, it is equally important to make players in the internal approval chain aware of their responsibilities:

  • Accept or decline deliveries as quickly as possible to avoid preventing invoicing
  • Pass on invoices more quickly after they are received — a digital tool can be particularly useful if players are working remotely
  • Organise an approval workflow in which each player in the chain is accountable for complying with payment terms

In conclusion, deviating from payment terms is in no way acceptable. For the supplier, it causes cash flow issues; for the client, it represents damage to their reputation and the risk of losing the trust of strategic suppliers.

This is why it is necessary to take action immediately and adjust your response appropriately. Bear in mind that it is considerably easier to respond when the players in the customer workflow are committed to complying with payment terms, when the subject is addressed from the moment the contract is signed, and when monitoring procedures are in place.

Fortunately, inter-company relations are usually oriented towards being considerate of partners and showing solidarity in uncertain times.

If you need more convincing, why not read the latest article by Julie Dang Tran, Managing Director of Manutan France: Three inspiring procurement stories from the COVID-19 pandemic