By Andrew Jesse, VP at Basware UK

Reputation, fairly or unfairly, governs our businesses in many ways: share price can be impacted, ratings revised, negotiations twisted, deals done and undone. Damaged at the drop of a hat but as persistent as a carpet stain, good ones are fragile but bad reputations can be difficult to shed.

Businesses large and small invest a huge amount in managing their reputation, investing in CSR campaigns, paying PR firms and of course ensuring their business practices are reputable and ethical. However there is one area where I’ve consistently found businesses to be unaware of how reputation is impacting their business. Payment, late or inconsistent payment, to be specific, is one area where businesses seem unaware of the damage they are doing.

If a business is consistently failing to pay its suppliers on time it’s no great leap to the idea that money troubles are afoot. Regardless of whether irregular or inconsistent payments are the result of a faltering business, erratic cash flow or a calculated strategy of taking suppliers to their limits, the perception of a business on the rocks can cause significant issues. Like rats and the proverbial ship, this assumption can rapidly and irreversibly impact share price, credit ratings and supplier networks or negotiations. For businesses large and small, listed and private, accounts payable can have a disconcerting power when it comes to business reputation, whether with suppliers, regulators or shareholders.

And this reputation goes on to have a lasting impact, particularly when it comes to negotiating procurement contracts. Naturally a record as a consistent payer will assist in securing better terms. Early repayment discounts and late payment penalties are commonly used in procurement contracts, but the premium paid by those with a poor reputation for payment is not always as transparent.

Over the years I’ve come across several examples of how poor payment has created challenges for businesses. Similarly I’ve come across a huge number of examples of how good practice has reaped unexpected rewards.

One instance brought both cases very clearly into focus. One customer, a heavyweight of the British high street, acquired a smaller retailer in Europe.  On reviewing the price book of the much smaller chain, they were surprised to find that one of their key suppliers, providing many product lines across their stores, was giving more favourable prices to the chain they acquired. The CFO was baffled. How was a much smaller chain of stores securing better prices than the major international retailer? Astonished that the strength of their purchasing power wasn’t at full force, he asked the supplier why this was the case. The answer? “They pay us when they say they will”.

To the supplier certainty of payment was worth far more than the volume of goods ordered. And in this case, we’re talking huge volumes – hundreds of products across over a thousand stores as well as an online business. Even the smallest difference in margin, when extrapolated across this volume, would have had a direct impact on the retailer’s profitability and its ability to offer competitive prices in the marketplace.

This inability to get the best possible price wasn’t the result of missing early payment discounts or negotiating extended payment terms, it was simply due to not paying to the terms agreed – not paying when you say you will; the effect of poor payment practice. When organisations look at optimising payments, they sometimes focus on early payment discounts against the value of money in the bank, but it’s worth assessing how this impacts your supplier relationship and discussing terms that may be more beneficial to both parties.

Needless to say, this finding prompted closer examination of their payment process and the impact it had on procurement, and saw the start of their journey through invoice automation, e-invoicing and adopting a holistic view of purchase to pay. They now achieve world-class metrics across their finance function and remain as one of the UK’s dominant retailers.

Giving the impression of poor financial management through inconsistent payment or by regularly breaching terms can be extremely damaging. Whilst some businesses may think that pushing out terms is supporting cash flow, in reality it could be doing more harm than good.

For some industries reputation with suppliers, customers and regulators can have a huge impact on the wider business. UniCredit were able to use invoice automation to improve the banks reputation, with suppliers and regulators, in tough times

“Our reputation is very important… we’re a bank.  Banks have always been looked upon, until very recently, as pillars of the community,” commented Ray Archer, Head of Accounts Payable at UniCredit Bank. “At the moment we have a situation where the banks are not as well-regarded in society so it is absolutely crucial for us to do as much as we possibly can to rebuild that reputation and being a good payer is one of the things that we can do to achieve that”.

There are alternatives for companies who want to hold onto cash whilst maintaining reputation. New offerings such as factoring or supplier financing can provide valuable breathing room across the business-to-business economy. By offering support for supplier financing businesses will be able to have their cake and eat it too, preserving reputation and holding onto cash.

Whilst reputation can occasionally seem intangible, in some instances poor payment practice could be actively limiting the credit options available to business. For one of our customers the impact of late payment was sharply revealed, not only in failing to achieve rebates and early repayment deals but also in their Dun and Bradstreet scores.

“Late payment to suppliers means that we don’t get the rebates and rates that we should.  It also negatively impacts our Dun and Bradstreet scores.  We have a very strong financial strength score as we are part of a large group, but our payment history score was not very good. One of the benefits of automation has been that our Dun & Bradstreet score is now improving over time.” Commented the Financial Controller at a large integrated services company.

Whilst their buying power meant many suppliers would still do business with them supplier relationships and negotiations were negatively impacted by poor payment practice.

“We’re part of a very large group, which actually means that most suppliers would do business with us.  Supplier relations are more important to us because previously we haven’t been in a very strong position to negotiate better rates, negotiate better rebates and effectively impact our bottom line,” the customer concluded.

So clearly payment to terms had a very tangible impact on the financial reputation, and a result the financial operations, of the company. Whilst some companies push out payment terms to preserve their cash flow position failure to keep to terms is often a result of poor internal processes. Inability to match purchases to payments, failure to get the necessary approvals in the required time frame, process bottle necks cause delays.

These delays result in missed discounts, penalties and suppliers who view the cost of doing business with you as high. Regardless of your purchasing power, once reputation of poor payment is in place it can have a significant impact on the business. Poor reputation will result in suppliers seeking to recoup the cost of dealing with you by other means, with discounts drying up and flexibility on pricing becoming a thing of the past. This, combined with reduced lines of credit, can all contribute to businesses feeling the burn of a poor payment reputation.

However by improving processes businesses can bring these factors back under their control. Whilst this improves reputation, crucially this control and transparency allows businesses to make payments on their own terms. The good news is that with effective tools, technology and processes a reputation can be swiftly repaired. Finances are fickle like that.