Some Kiwi milk producers have to wait almost four months for payment from dairy giant Fonterra, as the milk giant aligns with “international best practice” and pushes its terms of payment out to up to four months.
According to business journalist Michael West, multinationals such as Kellogg’s, Unilever and Nestle are creating a “punishing delay for family businesses that have to pay staff and a slew of other costs within the month”.
West says that Australia is a particularly notorious offender.
“Research by UK finance company MarketInvoice earlier this year found Australia to be the worst offender for late payments in its global survey, even ranking behind Mexico”, he says.
Fonterra issued a statement on its website in March regarding the change:
“In 2011, we identified that international best practice was to pay vendors supplying goods and services on a 60 day global standard payment. Part of our 2015 business transformation was to speed up compliance to this global standard term….As a result, an additional 1,000 of our largest NZ vendors have now been moved to this standard term.”
“We acknowledge that the pace of change in payment terms has been a challenge for some vendors and have been working with these vendors to help with this transition”.
Fonterra used to pay its contractors on the 20th of the month following job completion.
At the time of the announcement, Whanganui National MP Chester Borrows criticised the multinational for the extension, saying suppliers were already struggling with the wait, and in some cases, having to take out bank loans to cover costs.
“It’s scary to companies who are servicing an industry that is already under pressure and trying to keep people in jobs,” the minister told RNZ.
Philip McCarthy, lawyer with Auld Brewer Mazengarb & McEwen, argued that Fonterra’s increasingly aggressive terms for farmers was, indeed, cause for concern.
“Fonterra’s new payment term allows it to use its small business suppliers as a source of short-term finance to prop up its balance sheet,” he wrote in an op ed for Stuff.
“The effect is that those least able to afford extra financing costs are paying instead of Fonterra, causing them significant cash flow difficulties.”
“Fonterra’s reputation as a good creditor is damaged by it choosing to prop up its balance sheet at the expense of its suppliers’ balance sheets.”
the company announced that its milk price for farmers would remain the same – $4.25 per kilogram of milk solids – along with forecast earnings for this season between 50 – 60c per share, well below Dairy New Zealand’s estimated break even point of around $5.20.
Co-founder and CEO of invoice management company Debtor Daddy, Matt McFedries, says that it’s important that excessive payment terms are made public, as arrested cash flow can have negative effects for both business and the country’s economy as a whole.
“Having that public and constructive conversation is important,” he says.
“Ultimately, if there’s a structure in place – a payment code that people can believe in as being good for the country – that’s progress. Because holding the little guy to ransom isn’t a good way to do business.”
“Working capital is what you use to pay wages, kick off projects and hire staff. If you’re able to make a profit and generate cash, you can do things in the business – building products, innovating – and that’s good for the country. When you’ve got extended payment terms those options disappear. That’s your money locked away. You’ve done the work and as soon as that product is shipped or that service is complete, payment should follow swiftly behind.”
McFedries says that late payments have far-reaching effects on businesses, including lowered productivity, less innovation, and ultimately, smaller turnover.
“There’s the distraction, the diluting of [a business owner’s] focus that’s a problem – the time-consuming act of chasing debts, a skill many business owners don’t have. Some of the business owners we’re speaking to could be spending two or more hours a week just chasing debts. Some businesses spend up to two days a month, almost a month a year, just chasing debts. That’s a huge opportunity cost.”
“Even worse is that business owners often avoid the issue entirely, either through not having the time to do it or just not wanting to do it. And people often only recognise the problem when they realise that it’s affecting their bottom line. That’s when they come to us”.
West says there is hope however.
“When Rio Tinto moved to double the length of its payments to suppliers from 45 to 90 days earlier this year, a fierce backlash from suppliers and ensuing political pressure forced the company to renege,” he says.
“What is needed from small business peak bodies is a register of company payment terms. It is only when such things are made public, as was the case with identifying (or ‘naming and shaming’ as detractors like to call it) specific multinational tax avoiders, that there was a concerted political response. All that is needed, in other words, is a list.”