Target’s recent fall to bankruptcy in Canada means bad news for a lot of people. The company filed for bankruptcy protection last month and announced it will close all 133 Canadian locations this Spring, meaning 17,600 Target employees will be out without a job.
Perhaps less prominently highlighted in the media are the thousands of Target suppliers, many of which are small businesses, now left with unpaid invoices. Reports are emerging of checks written by Target getting bounced, raising an issue that goes beyond late-payments and touches upon the need for procurement practices to go digital to improve cash flow management.
According to reports, nearly 2,000 creditors are now in limbo with Target, waiting to see if they’ll ever get paid. Some of those suppliers launched legal action last week in Ontario Superior Court in efforts to get back some inventory from Target Canada.
ISSI, a baby product supplier for Target Canada, told reporters through legal representation that because Target Canada is in the midst of a liquidation and not a restructuring, suppliers may be able to get their products back, or be paid from sales of those items.
Recent court filings show Target Canada estimates the total value of liquidation sales to be between CAD$445 million and $475 million. Justice Geoffrey Morawetz have given Target one week to offer up data on the value of goods received within the last 30 days.
Nintendo Canada and PepsiCo Canada are also among the suppliers in the midst of legal proceedings against Target. But not all suppliers are big businesses; some are small enterprises who will likely be hit hardest from the fallout. Tanya Vierhuis, a market researcher at Blue Vista Insights, is one such small supplier who says Target’s payment default is worth a four-month mortgage payment for her.
According to reports, Vierhuis received a check in late-January – dated January 13 – for $18,000 from Target as payment for a customer feedback project. Target was granted creditor protection from he courts and, when Vierhuis went to cash the check, it bounced.
US suppliers are feeling the burden, too – according to reports, Minnesota suppliers alone are owed nearly $5 million from Target Canada, many of whom followed Target to Canada when it launched operations there in 2011.
Minnesota service provider Retail Merchandising Services says that Target’s inability to pay hundreds of thousands of dollars won’t necessarily sink the firm, but will make a significant impact. “We won’t have a profit-sharing contribution for 2014,” RMS President Phil Lamers said. “We have a line of credit and we’ve got to use that to a greater degree than I would like.”
According to statistics, B2B players in Canada are some of the most at-ease when it comes to late payments. Risk management firm Atradius recently released its 2014 Payment Practices Barometer, analyzing B2B payment behavior by region across the globe. Researchers found that on average, 38.4 percent of the total value of invoices issued by B2B respondents in the Americas remained unpaid by the actual due date. In Canada, that number landed at 34 percent.
But Atradius found that Canada holds strong reputation for B2B payments, with the nation holding the lowest percentage of receivables being deemed uncollectable (just 2.1 percent, compared with 3.2 percent in the US).
Despite the numbers, Target Canada’s situation demonstrates how suppliers need to take greater control of their cash flow even when doing business some of the most seemingly low-risk buyers.
“Unpaid invoices can have a serious impact on a businesses’ turnover or cash flow,” the study concludes. “Not only because non-payment by buyers costs a business time and money in respect to pursuing collection of debts, but also because bad debt reserves represent money that is unavailable for use in growing the business.”
Suppliers are already suffering from a late-payment trend occurring across the globe. But even with Canada’s record for holding some of the lowest percentages of late payments, suppliers in the country are now facing the reality of not getting paid – ever. That saga could mean it’s time for suppliers to take greater control of their cash flow.
The digitization of the procurement process doesn’t mean that suppliers will be fully protected if a buyer goes out of business. But fully-integrated e-procurement practices could offer greater support to suppliers when they need to get paid, experts say.
Using checks to pay suppliers, as Target Canada did for Vierhuis, for example, demonstrates the need for an upgraded procurement process. According to recent research from Bill.com, the use of checks to pay suppliers has decreased to 50 percent of businesses surveyed in 2014, compared with 80 percent of businesses using the payment method in 2004.
But 80 percent of the businesses surveyed still use manual payment processing methods, according to Bill.com CEO and Founder René Lacerte. “The industry is due for a major overhaul,” he said regarding these statistics.
That overhaul may already be emerging. According to recent research, e-procurement and digitization of the B2B payments space is spreading across the globe, largely thanks to the proven benefits of the technology. One study conducted by ICD Manufacturing, released last October, concluded that the benefits of a digital procurement system go “beyond cost reduction,” often increasing speed of business.
The ICD study also found that “financial metrics such as cash-to-cash cycle time, days of sales outstanding, and invoice processing time are more impacted by IT systems supporting real-time, synchronous, and collaborative information flows.”
In other words, real-time data flow, one of the most significant benefits from e-procurement practices, has one of the largest impacts on cash flow management.
In the very least, migrating to digital procurement practices may cushion the blow for some suppliers if a buyer goes bust. In the very least, benefits like real-time cash flow data and instant payment methods help suppliers to more accurately assess their financial situation – and their next move – when a buyer can’t pay up.
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