Despite actions to speed up payments to suppliers during the pandemic, many companies are once again fighting to maintain a healthy cash flow, with long contractual terms and late payments a recurring problem. Dominic Weaver speaks to business leaders about the issue – and hears their solutions and advice about how to get paid on time
After the safety of staff and transferees, the most pressing issue for the mobility industry to address during the first months of the pandemic was maintaining good cash flow. As business operations stopped and started in response to lockdown measures, widespread long contractual payment terms and a laissez-faire attitude to collecting debts were highlighted as points for urgent attention as firms struggled to stay solvent.
Global mobility responded with a great deal of talk about working together to tackle the problem for good – with many following through with action, too. Dwellworks CEO Bob Rosing is among those whose business, thanks to ‘strong long-term partnerships and client relationships’, could shorten payment terms during COVID. Meanwhile, Rene Webster, Group Director, Global Mobility at Mobilitas, says that, despite payments initially taking longer at the outset of the pandemic because of a lack of access to software and documents, the crisis led to the supply chain collaborating more closely.
‘Clients – and us with our suppliers – were concerned that good suppliers with limited cash flows would go under,’ she says. ‘Consequently, they became more understanding and relaxed payment terms.’
She adds that these agreements have ‘largely remained in place’, with the governments of some countries also stepping in to regulate on terms.
However, despite these positive changes, a LinkedIn poll run by FIDI this April found that almost 90 per cent of businesses are now being paid no faster than before COVID – with more than half saying that, in fact, clients are taking longer to pay, and a further 38 per cent stating they have seen no lasting change.
Add this to the results of the latest FAIM Financial Assessment report by EY – which is based on the performance of 92 per cent of the membership – and it suggests a problem Affiliates have an urgent interest in solving. The assessment’s most recent figures show that – while FIDI membership is generally financially healthy (the percentage with low credit risk ratings increased from 84 per cent to 88 per cent last year) – there has been a significant decrease in operating cash flow, with liquidity falling from 21 per cent to 13 per cent.
‘Liquidity risk on a group level is getting worse,’ says Thijs Deweerdt, Senior Manager and Internal Auditor at EY, adding that the issue is largely poor cash flow.
‘This is mainly explained by the pressure on payment terms in Affiliates’ supply chains,’ he says. ‘Movers are under constant pressure from their corporates and RMCs to accept very long terms.’
The impact of this is compounded by generally low margins in the industry. ‘While profitability has slightly increased in comparison to last year, operating profit ratio is still only four per cent. In most industries, companies are targeting 10 per cent – and only 22 per cent of FIDI’s membership can meet that threshold,’ says Deweerdt.
Add this to the ongoing, post-COVID squeeze on supply chain costs, availability, and reliability, and you have a situation that businesses would be wise to address rapidly. Cedric Castro, FIDI Treasurer and Board member, and CEO of AGS Mobilitas Group, says the pandemic and ensuing financial pressure has heightened the mobility industry’s focus on getting payment terms right. ‘It made all of us understand that we can’t just be the last one to be paid or the one accepting the longest payment terms just because our clients expect it,’ he says.
Santa Fe’s CEO Runar Nilsen says that, since the company’s takeover in 2019, its cash position has improved, but adds ‘we are not yet where we want to be’. As an industry, though, he says: ‘We need to break the old habit of being stuck in the middle when it comes to cash.’
An unbalanced equation
With a broad range of company types and sizes playing varied roles in the delivery of global mobility services, cash-flow requirements of businesses can differ widely. However, while payment terms start at 100 per cent up front for individual customers, 60 or 90-day terms are often expected by corporate clients and RMCs, which, with delays – intentional or not – can stretch to as much as 180 days from invoicing to payment. This can be difficult to manage. The time lag from clients commissioning to billing adds an additional obstacle to healthy cash flow, with firms incurring costs well before they can even raise an invoice. Rene Stegmann, of Cape Town-based DSP Relocation Africa, says: ‘Purely by the nature of the delivery of the services, we are giving way more than 30 days. And the job can be anything from 10 weeks to three months. So, if you add three months’ payment terms, that could be six months from the beginning of a job to getting paid. This is not a sustainable business practice.’
Kay Kutt, CEO of Silk Relo, agrees: ‘For our V&I and DSP, the majority of clients mandate that invoices are only issued when services are completed. The time from the commencement of services along with out-of-pocket costs to support work that could take weeks or months to complete, along with a 120-day payment cycle, is an unreasonable expectation,’ she says. She adds that smaller businesses will find it particularly difficult to fund activities up front, particularly in the current high-cost environment.
‘Getting payment from the client as soon as possible to flow through and out to your partners truly helps,’ she says.
The RMC issue However, holding onto cash for as long as possible is part of the business model for some companies, with RMCs the most-cited culprits.
‘We’ve noted that a good number of our RMC partners have chosen to respond to their cash- flow challenges with their clients by extending their accounts’ receivable terms to their partners,’ says Kutt. This has involved lengthening terms to 90 or 120 days, with ‘some testing the waters and asking for 180 days’, and often slipping towards an additional 30 to 60-day turnaround for payment.
Lars Lemche, a Director at Brazilian Teamwork, says: ‘Several agents and RMCs are paying at more than 60 days, and even some up to 120 days – which we do not want to work with.’
Lemche says that if long payment terms were problematic before the pandemic, today’s inflationary pressures have magnified the issue significantly.
‘Some of the big RMCs have sold payment conditions around the world with extended conditions, without asking their suppliers if they were OK with that,’ he says. ‘That created a cash-flow problem for everybody and now, with increases in ocean freight, it has become impossible to handle those huge costs without being paid in a timely manner. The maths does not work.’ Additional terminal handling and port charges have deepened the issue further, he says.
Lemche adds that the company has even found that a small number of FIDI-accredited agents have reneged on their initial commitments.
Kutt adds that a couple of larger RMCs who have lengthened their terms are, in practice, paying their bills before 45 days. ‘This is a refreshing and supportive recognition of what is needed by partners in the field,’ she says, adding that these companies ‘easily become a partner of choice’.
In contrast, she says, other partners are pushing their own issues with getting paid downstream to suppliers, ‘indicating that their client hasn’t paid, so they cannot pay’. These usually uncontracted actions are a ‘red flag… that often breaks the working relationship and trust’, she says.
It is worth noting that some report a different experience, with Rosing, at Dwellworks, stating: ‘We work with all RMCs, who are mostly very large financially stable entities, and have a solid mutual understanding… and it is very rare to pay out of terms.’ At RMC Champion, COO and President Rudy Planavsky says the company ‘actively’ sticks to the 90-day terms agreed up front with its moving partners – while receivables terms with clients range from 30 days to 90 days, often according to their own stipulated terms rather than Champion’s.
However, he says: ‘Not all clients are timely with their payments, regardless of the agreed terms, which can create cash-flow issues.’
No matter where their business sits in the supply chain, mobility sector heads concur that agreed payment terms – and their customers’ inclination to stick to them – have a significant bearing on their operations.
At Mobilitas, Webster says: ‘Payments terms have a massive impact on our working capital. If they are not managed carefully, we run the risk of a cash-flow deficit.’ And, while it is ‘critical’ to pay suppliers on time and retain a good working relationship, ‘this can be difficult if we don’t get paid on time ourselves’.
She adds that a lack of working capital – along with today’s higher borrowing costs – makes it more difficult for businesses to remain competitive with investments in new technology, markets, and services.
Santa Fe’s Nilsen says slick management of cash and working capital is ‘key, aligning inflows with outflow, so we do not end up acting as a bank for our clients’. He adds that, as not all payments will be timely, ‘ideally there will always be a need to have longer terms towards suppliers than towards customers to help cushion this’.
‘In an ideal world, client terms would be 30 days and supplier terms 45 days,’ says Webster.
While any differential in client/supplier terms inevitably creates an imbalance somewhere in the supply chain, this 15-day cushion seems prudent to mitigate the risk of payment delays. However, wise firms also know that keeping their contractors healthy is the right thing to do – morally, and from the point of view of supply chain stability. Nilsen says allowing smaller suppliers, in particular, ‘to bill early, with short and predictable payment terms to match with their costs, should benefit all parties’.
‘It makes a big difference if you pay your supply chain quickly – especially the small companies – and help them to be financially sustainable,’ says Castro. ‘On the other hand, you always try to manage your cash flow according to your clients and the payment terms agreed.’
Most spokespeople say they agree with this approach, but several say that more client education is also needed to get the flow of capital really working to everyone’s advantage.
Webster says today’s supply issues make this vital, adding that the relo sector in particular needs to get better at communicating with its clients.
‘The household goods industry has been much better than relocation at explaining increases in costs,’ she says. ‘We need to educate our clients and make them understand the situation.’
To do this, businesses must consider increasing their transparency dramatically. ‘Our model is most often an all-encompassing fee, so our clients don’t see our carrying costs. It may be better to disclose these costs, so the client is reminded of what they are… and that if they pay us late and we pay our suppliers on time, we are out of pocket,’ she says.
‘To have a better industry, you have to educate your clients,’ says Castro, who adds that firms should also be communicating the current difficulties in recruiting drivers, packers and move coordinators, high labour costs, and the general squeeze on margins.
At Relocation Africa, Stegmann believes that, as the focus grows on sustainability in all its forms, the nature of supplier/client discussions will progress, too.
‘Procurement has to change, and sustainability has to be brought directly into the core of the business,’ she says. ‘We need to think differently and consider both the sustainability metrics and the procurement metrics. If these different parts of the business start collaborating, solutions will come.’
A mandate to pay?
Industry associations including FIDI certainly have a role facilitating conversations within supply chains (see panel, ‘Industry payment terms: FIDI’s role’) and setting out best practice guidelines.
But should they go further and mandate maximum payment terms – and even make them a requisite of membership?
Some say yes. ‘It would standardise, and protect the supply chain and good-quality suppliers, levelling the playing field for all,’ says Webster. Castro adds he would like to say ‘payment required 30 days from packing’ rather than on delivery ‘as the majority of our disbursements are paid by then’. Kutt agrees, but points out that this ‘ideal scenario’ depends on everyone keeping to the agreement. Champion’s Planavsky says the cash-flow equation is universally lop-sided – and not unique to moving – and, with ‘a great majority of agents not large bookers of business’, he doesn’t consider enforcing 30-day terms a workable option.
‘For companies like Champion, who are larger bookers of corporate business and have to wait much more than 30 days to be paid by our accounts, this is not a realistic expectation,’ he says. ‘We could not operate effectively with 30-day terms with our trading partners.’
In the absence of an industry payment standard, firms can help themselves by facing the issue of agreed terms (and sticking to them) head on; with price incentives a useful tool. Nilsen says: ‘The cost of money is as real as the cost of a truck. When big clients push for extended terms, it has a cost that needs to be reflected in the price.’ Stegmann takes this a step further, by implementing a strict tiered pricing structure for clients, according to the payment terms they want (see panel, #Payin30).
A two-way street
Such an approach is a strong reminder that a healthy client/supplier relationship is a two-way street: a confident supplier provides high-quality services, but is clear they expect timely payment in return.
‘Clients remind us constantly that the number one priority we need to deliver on is managing expectations in servicing their transferees and clients,’ says Kutt. ‘We need to proactively manage the expectations on our payment terms and the expectations to pay on time.’
Kutt adds that suppliers need to be crystal clear with clients on terms, invoicing, receivables, and late-payment penalties from the outset. ‘If you’re ambiguous in the expectations, it is easy to have slippage where clients take advantage of the system,’ she says.
Castro agrees, advocating best practice of questioning and discussing contracts with corporate clients; being meticulous with the invoicing admin, and confident with enforcement of the terms agreed. If you have negotiated the right contract for your business up front, it’s not the terms that are a problem – it’s a failure to enforce them.
‘Some moving companies have the impression… that debt collection puts you at risk with your client,’ he says. ‘However, what puts you at risk is not implementing the admin process with your clients. Working on the payment process as part of the operational process must be included in your implementation.’
He concludes with a call to action: if a partner insists on terms that are not viable from the outset, don’t work with them.
‘More companies are refusing jobs without acceptable payment terms and a clear escalation solution in case of non-payment,’ he says. ‘If we want to improve the system, we should – all of us – start saying no to longer payment terms. We should refuse to take business if our partners ask us to tolerate long payment terms and stop working with companies that do not pay their supply chain.’
Best practice tips for getting paid
‘Getting the right terms up front. Human capital is also key. It’s inevitable there will be questions around an invoice at some point, but having the right talent in house has allowed us to respond very quickly.’
Bob Rosing, CEO Dwellworks
‘Always claim late-payment fees and establish clear credit limits and cash up front if this is breached. We need to act as well as the big corporations’ procurement departments.’
Runar Nilsen, Santa Fe
‘Be persistent and set boundaries as to what is acceptable to you. Your business plan needs to account for untimely receivables – and set proper expectations for payables with your moving partners.’
Rudy Planavsky, Champion
‘Invoice promptly and accurately and do not be shy in following up and asking for timely payment. It is all part of the process.’
Kay Kutt, Silk Relo
‘Ensure comprehensive processes so there are no delays or mistakes in raising invoices; take the time to understand your clients’ financial processes; and ensure you clearly address payment terms in your contracts.’
Rene Webster, Mobilitas
‘It is a must to have your team doing debt collection on a permanent basis, following up and collecting payments from all your clients.’
Cedric Castro, FIDI Treasurer
#Payin30: Getting the terms you want: a case study
Rene Stegmann, Director of Cape Town-based DSP Relocation Africa, launched the #Payin30 campaign inspired by an article about multinationals in South Africa saying they would support smaller businesses by paying in 30 days, rather than 60 or even 90 days.
Stegmann says the potential for the most difficult discussions about payment aren’t with large clients, but rather with the staff or smaller suppliers who would have to wait to get paid if their wages were delayed.
Having honest, open dialogue with customers around business sustainability and keeping service levels high has led to 100 per cent acceptance of 30-day payment terms.
‘People ask why companies go out of business and 99 per cent of the time it is bad cash-flow management,’ says Stegmann, ‘and I can deliver a better service to you if I know in 30 days you’re going to be paying me.’ Stegmann says she ensures clients understand the implications of paying later – and the benefits of paying on time.
‘A large new direct corporate client recently said to me their payment terms were 90 days, but by the end of the conversation, they had reduced to 15 days,’ she says. ‘We need to understand each other’s financial positions and put clients in our place so they know what we’re experiencing. Very often [we’re dealing with] an employee at a big company with KPIs and they’re going to have to explain the motivation to their boss. So, the better we explain it to them, the easier it is for us all to negotiate.’
During this process, Stegmann adds that giving more favourable tariffs for early payment and adding interest for 60 or 90-day terms can also work wonders.
‘I recommend people have a reduced rate for those who pay in 30 days. For those who pay in 60 days, it’s plus two per cent; and for those who pay in 90 days, it’s plus five per cent,’ she says.
All Relocation Africa’s clients have now agreed to the 30-day stipulation – with one large RMC revealing that it was the first time it had made such a commitment to a destination services provider – and Relocation Africa pays its suppliers on the same terms, too.
However, with global mobility supply chains tightly interlinked, it’s essential to spread these intentions wider still. ‘I think every DSP, every mover, should have a ‘pay in 30’ campaign, using #payin30,’ says Stegmann. ‘If I’m on this journey alone, clients and RMCs could end up pushing back. It’s important we gain momentum to make ‘within 30 days’ normal for the business, which will be better for the supply chain holistically and sustainably into the future.’