Monday 16 August 2010

M&S extension of credit terms from suppliers

News from The Telegraph that the company has apparently told 860 companies that provide it with 'general merchandise' – clothing, shoes and household goods – that from next month, payment terms will be extended. Suppliers shipping goods to M&S and firms that help the retailer with storage and distribution, have been paid within 30 days of submitting an invoice. But from the start of September, M&S is promising to pay only within 60 days.


Suppose supplier sells £2.5m per annum to M&S, 30 days credit

Cost of interest = 9%

Average amount outstanding = £208,000 i.e £2.5m/12

Therefore cost of credit        = £18,750 i.e. £208,000 x 9%

Credit period extended to 60 days

Average amount outstanding = £416,000

Cost of credit                        = £37,500

Therefore additional cost     = £18,750

= 0.75% of suppliers sales   = additional cost to serve

Incremental sales by supplier to cover of additional credit = £187,500, assuming 10% net profit
(See NamCalc for this & 33 extra tools to calculate total cost to serve)

Incremental sales by M&S to generate gain from supplier extra credit = £257,554, based on M&S Net Profit of 7.28%, latest published accounts

In other words, the supplier has several options:

1. Object to the new terms: if nothing else changes, the supplier is handing over £18,750 (see Fair share negotiation video) Not to object can send a signal that even more extra credit should have been requested.

2. Demand equivalent value from customer, ability to generate additional sales of £187,500 to customer, at no extra cost

3. Walk away…... (Work out incremental sales required from other customers to cover lost sales, conduct 'what-ifs on same additional credit period being extended to other customers ) and challenge basic business model.

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