Monday 23 November 2015

Debenhams alleged early payment discounts - what it can mean for suppliers

According to The Telegraph, Debenhams have allegedly asked its suppliers for a reduction between 1% and 2%, in return for payment between 30 and 60 days earlier than usual.

Whilst suppliers obviously have the option to walk away, it can be more productive to negotiate, using numbers based on the current business. One approach could be as follows, substituting your own figures as appropriate, and checking with your finance department:

- Supplier annual sales to the customer: £2,500,000
- Current credit given to customer: 65 days
- Supplier’s cost of borrowing money: 5%

                                                                                        60-day reduction        30-day reduction    
Annual Invoiced sales to the Customer = £2,500,000

Customer currently pays in 65 days = 5.6 times/annum
                                                          i.e. 365/65

We want the customer to pay in                                        5 days
                                                                                       i.e. 73 times/annum

We want the customer to pay in                                                                                   35 days                                                                                                                                                i.e. 10.4 times/annum

Amount owing based on 65 days                                            £446k                               £446k
Amount owing based on 5 days                                              £34k i.e. £2.5m/73

Amount owing based on 35 days                                                                           £240k i.e. £2.5m/10.4

Cashflow saving for supplier                                                  £412k                           £206k
Cost of borrowing @ 5%/annum                                             £20.6k                          £10.3k
                                                                                          = 0.82% of sales             = 0.4% of sales

Supplier should resist giving a discount more than 0.8% on a payment made 60 days earlier, or 0.4% discount for 30 days earlier. i.e. any discount above 0.8% for 60 days or 0.4% for 30 days is greater than the supplier’s 5% borrowing cost

Again, substitute your figures in the above calculations to establish your negotiation parameters, and check with finance colleagues… 

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