Monday, 22 October 2012

Sainsbury's changes to non-foods payment terms...the bottom-line impact

According to The Telegraph, Sainsbury’s have extended its standard payment terms to 75 days for all non-food suppliers. In some cases, this will mean suppliers waiting more than twice as long for payment. In the unlikely event that a supplier decides to withhold supplies, or even attempts to negotiate a compromise, it is vital that such decisions be fact-based.

This means calculating the cost of the change in terms along the following lines: (check through the method with your finance people, and substitute your own figures)

Assumptions: 
- Supplier has a net margin of 7.5% and sells £5m per annum to the retailer, payment in 40 days, net
- Cost of borrowing is 8%

Cost to supplier of giving 40 days credit:
- Number of times per annum the supplier is paid, on 40 days        = 365/40
                                                                                                    = 9 times, approx.
- Average amount owed by retailer                                               = £5m/9
                                                                                                    = £556k i.e. a permanent loan to the retailer, interest-free
      -    Cost of borrowing to give 40 days free credit                     = £556k/100 x 8
                                                                                                     = £44.5k

Cost to supplier of payment extension to 75 days: i.e. 35 days extra
- Number of times per annum the supplier is paid, on 75 days        = 365/75
                                                                                                    = 4.9 times, approx.
- Average amount owed by retailer                                               = £5m/4.9
                                                                                                    = £1,020k i.e. a permanent loan to retailer, interest-free
- Cost of borrowing to give 75 days free credit                              = £1,020k/100 x 8
                                                                                                    = £81.6k
- Therefore cost of additional 35 days                                           = £81.6k - £44.5k
                                                                                                    = £37.1k

For the supplier, this is the equivalent of incremental sales of £494.7k (i.e. £37.1k / 7.5 x 100, a 9.9% increase in sales).

In other words, to maintain the status quo in a fair-share relationship, the supplier needs a concession from the retailer of £37.1k, or will suffer a drop in net margin on the retailer’s business from 7.5% to 6.8% (i.e. £5m/100 x 7.5 = £375k - £37.1k = £337.9k/£5m x 100 = 6.8%)

Why not run the numbers on your business, using your figures in the above calculation, to explore the impact on your bottom line, and re-assess your negotiation  strategies…?

1 comment:

Muhammad Amir said...

Other occupants of the Hall include Dell, Argos and Carlsberg, who have apparently also increased supplier payment times retrospectively. PPI help