Procter & Gamble is looking to move its payment terms from 45 days to 75 days, according to the Wall Street Journal. GE pays its bills on a standard net 120 -- this one I know from personal experience.
And, while there are work-arounds that are easier for larger agencies to take advantage of (like bridge payments from banks), these work-arounds are harder for smaller and newer agencies.
That's not good for social media marketing.
Social media changes at a rapid pace -- a pace requiring change that is often difficult for larger agencies to keep up with. While I know plenty of individuals at large companies who can keep up with this change, I'm talking about the actual agency structure.
Often it takes a newer, smaller and more nimble agency to develop the new processes and structures that create efficiencies in a rapidly changing marketplace like social media.
However, the best and brightest who are thinking of going out on their own to start social-media-centric agencies are going to find their cash flow increasingly squeezed if they have to operate on terms of net 75-120 days. No matter how much these folks are the best or the brightest, cash is often more important than brains in a new startup.
While running a small agency, I've walked away from business due to bad payment terms. And I know I'm not the only one.
I understand these moves help companies like P&G and GE open up cash flow themselves to invest in infrastructure, but lately many of these companies are using it as a method for financing stock buybacks and dividend payouts.
Basically, they are using their suppliers to pay their stockholders.
I submit that a better, long-term strategy would be to free up capital to pay suppliers faster and incentivize them to perform at higher levels. “Higher levels of performance” is another way of saying higher levels of results, which of course result in higher profits.
Those profits are what should be used for stock buybacks and dividend payouts. Otherwise, the businesses are using financing terms to fake increased profitability. This is simply bad long-term thinking, confuses the true state of affairs for stockholders, and limits the companies' abilities to engage with the newer suppliers that can't handle the payment terms.
When are we going to learn that short-term financial thinking rarely benefits the long term?
Eventually you have to pay the piper. So let's start by paying suppliers a little more quickly.