Dell, Cisco, Other Large Companies Lengthening Payment Terms to Vendors

Small

businesses that sell to companies like Dell, Cisco, Wal-Mart, and other

behemoths need to know there is a growing trend toward slow paying

vendors, even small business vendors.

In

July 2010 Dell Computer announced that it would start paying nearly all

vendors on 65 day terms rather than its previous benchmark of 50 days.

On March 31, 2010 Cisco announced it was moving to a longer payment

cycle after benchmarking its accounts payable process against other

technology companies of the same size. Cisco was changing its policy on

vendor payments to 60 days.

Supply

chain financing helps these large companies because it can greatly

improve their cash flow. if you want to sell to them, you have to agree

to their terms of payment. Rarely is there negotiating room.

I

can almost guarantee that Dell doesn’t offer 60 day terms to its large

commercial customers. In fact what makes the Dell model so efficient for

its company is if you are a Dell product component supplier, you are

likely to be required to maintain your parts inventory in a warehouse

very close to their factory line. If you are a small supplier you must

pay a logistics company that is certified by Dell to inventory a

required amount of goods so they can be delivered throughout the workday

to the Dell factory. Dell perfected the just in time manufacturing

process for the computer industry.

Vendors

that provide components to Dell are not allowed to invoice for the

goods until Dell has received them and they are installed in a computer,

laptop, server, or other product. Then the accounts receivable cycle

starts. Before you even get to invoice Dell, you have put out your own

cash to build your component, most likely ship it to the U.S. or to a

warehouse near Dell’s factories, then store it there for as long as it

takes for Dell to use it. Your complete cycle from first purchase of

materials to final payment from Dell can be as long as 120 days.

Dell

sells custom built computers to a large number of individuals and small

businesses. For those kind of clients, Dell expects to get you to

provide credit card information at time of order. They may not actually

charge your credit card until your computer ships, but they certainly

put a hold on those funds at the time the take your order. So they get

paid from consumers and small businesses in about 3-4 days after they

ship your system, but don’t pay their vendors for 45 - 60 days. It is

the perfect model of using other people’s money (OPM) to finance their

working capital.

Businesses

that sell to Wal-Mart have long understood this paradigm. I once

financed a company that sold frozen enchiladas that contained beef to

Wal-Mart. My customer was a mid-sized business that manufactured other

frozen foods as well as corn tortilla chips. The manufacturer was based

in Texas which has a quirky law that says suppliers of beef products

must be paid by their customer within 7 days of delivery. Wal-Mart

purchased several truckloads of enchiladas a week from my customer. Each

truckload was valued at $80,000. So each week they accrued $160,000 in

new accounts receivable. Wal-Mart rarely paid them in less than 45 days

so that meant my client carried around $320,000 in Wal-Mart receivables.

Wal-Mart totally disregarded prompt payment law for Texas beef products

for product that was delivered in Texas. The bank I worked for was

sympathetic and we provided an accounts receivable financing line of

credit that met the client’s needs, but it was still always a struggle

for the client because they had to pay for their raw materials and cost

of goods sold promptly while waiting on Wal-Mart to pay.

Small

business owners sometimes think they have hit the holy grail when they

get a product into a big account like Wal-Mart. I can assure you it is

not.

Small business owners need to consider the following before landing the “whale” account:

• Can my company make a reasonable profit on sales to the whale?
• Can I finance my increase in inventory, payroll, and accounts receivable and still make a reasonable profit?
• Will my business suffer significantly if the whale finds a new supplier to take my place?