Just three months after announcing plans to extend the payment terms of new contracts from 60 to 90 days, beverage conglomerate Diageo has reversed its tune. Diageo, which owns popular brands Johnnie Walker whiskey and Guinness beer, will maintain its current timeframe of 60 days. The Forum of Private Business (FPB), a U.K.-based lobbying group that criticized the beverage company’s plans to delay payments to suppliers immediately after it was announced, calls the reversal a victory; but there is still a lot of work to be done to solve the problem of late payments.
In a letter to suppliers sent in January, republished in part by The Telegraph, Diageo cited the need to “improve our cash flow and drive out costs” as the motivation for longer payment terms, which were supposed to go into effect on Feb. 1. To assist businesses affected by delayed payments, the letter also detailed a financing program in partnership with Spanish Bank Santander. Phil Orford, chief executive of the FPB, told the newspaper extending payment terms, “is hugely damaging for small businesses.”
Late payments are particularly hard for smaller suppliers to absorb. Outstanding payments place extreme pressure on the cash flow of SMB and affect their ability to meet other financial obligations. In the U.K. alone, small to midsize businesses were owed £39.4 billion ($58.8 billion) in late payments last year, according to BACS Payment Schemes clearinghouse. The average owed to an individual business topped £38,000 (nearly $58,000). Late payments do more than just harm individual businesses. In January, the U.K.’s Institute of Directors found not paying on time is hampering economic growth. The Small Business, Enterprise and Employment Bill, which is currently before Parliament, would give regulators the authority to punish companies for paying suppliers late.
In a statement to BeverageDaily.com about their decision to not increase payment terms, Diageo pointed to the importance of SMBs to the U.K. economy and Diageo’s own business. “Diageo values its long term and collaborative relationships with its suppliers,” the statement continued. Orford called the reversal “a victory for common sense.” He continued that FPB will continue to push for industry-wide reform against the growing trend of “grossly unfair payment terms.”
Diageo is not the only business to face scrutiny in the U.K. for extremely lengthy payment terms. AB InBev, which owns the Stella Artois and Budweiser brands, received a complaint of imposing payment terms of up to six months on suppliers. It has also been reported that packaged foods company Heinz, told some suppliers they would have to wait 97 days to be paid, more than double its standard term of 45—Heinz has not publicly addressed the issue. While some experts support the use of legislation to minimize late supplier payments, there are potential consequences. Spend Matters covers the potential impact of legislating late payments, from large corporations simply forgoing contracts with small suppliers to the time and man-powered required for overseeing compliance to the regulations.
The United States is also moving toward finding federally supported ways to help small businesses get paid in a timely manner. Late last year, 26 corporations including Coca-Cola, Apple and Walgreens had to participate in a White House initiative called SupplierPay. Participating companies agreed to pay their suppliers faster for parts and services, or provide access to less-expensive financing. SMBs now wait an average of two months to receive payment—a trend that shows no signs of slowing, according to The Wall Street Journal. SupplierPay is modeled after another initiative called QuickPay that requires federal departments to submit payments to small-business contractors within 15 days. According to The Washington Post, the program has saved small businesses more than $1 billion since its launch three years ago.
Diageo’s decision not to prolong payment terms is a step forward in acknowledging the harm late payments can do to small and midsize suppliers. Whether legislation or governmental mandates are needed to get other companies to follow suit is still in question.