We’ve all been there – you land a nice juicy contract from a Fortune 100 company and then you receive the paperwork (or an MSA) which informs you that their payment terms are 90 days from receipt of invoice. In less avaricious times, those terms may have been 30 or 45 days, but now so many of our clients are being told (without any hint of negotiation) that those terms have been doubled or even tripled.
What, in the name of all that is capitalism, makes such large companies, who are sitting on enormous piles of cash, think that it is right to make small businesses their bankers? Some bolder clients are now pushing the envelope out even further and insisting on 120 days. That’s right – you are expected to finance their operations for a full four months!
Let’s just put this in context for a moment. Imagine you are a $5 million research agency and that you win a project priced at $100,000 plus $20,000 in incentive payments. In all likelihood, you have priced this project down as far as you can to win the work. If really unlucky, you were subject to a reverse auction – a wickedly pernicious form of extortion to drive prices down to the bare minimum. The project is expected to be fully completed in six weeks. At commissioning, you invoice 50% of the fees and (if fortunate) the incentives – a total of $70,000. You then complete the project on time, but the payment terms are 90 days. That means that, at week six, you have shelled out $20,000 in incentives as well as all the variable out-of-pocket project costs – assume these are 50% of the fees, so $50,000. You have also paid your project managers, analysts and senior researchers to produce an excellent report, which had a real, positive impact on the client’s business. But you are still out of pocket by $100,000 – and it’s six more weeks before you will receive $70,000 of that!
At the end of the six weeks, you invoice the final $50,000 – which you receive 12 weeks later. You have been out of $70,000 for six to twelve weeks, and $50,000 for six to twenty-four weeks (depending on how fast you pay your suppliers). That means that you have cut into your own cash on hand – or worse, your line of credit – to the tune of six figures just so that your very rich client can extract another drop of interest from their own cash pile.
If you are a $5 million research company, chances are that your cash in hand is somewhere between $300,000 and $500,000 and that you might have an equivalent line of credit. Let’s say you have a wonderful sales month and land five such projects in the month. Your cash on hand is wiped out just by the fact of performing great work for your clients and it’s entirely possible you will crash up against your LOC credit limit. We have numerous clients who have faced this conundrum – and a couple that have almost been brought to their knees by acting as their clients’ bankers.
It’s time to stand up to Big Business and say, “this is not morally acceptable, nor is it good business.” How on earth can you ask your agencies to partner with you when you are screwing them financially, sometimes almost fatally? C’mon guys! Think!