Cash Is King

I have recently been fascinated by the specific factors that contribute to the high failure rate of startups. We have seen many reasons for small business failing including poor planning to poor staffing, and ineffective marketing. 

However, if I was to name one main reason for business failures, it would have to be Cash Flow. 

Nothing recently highlighted this fact more than an article I read in The Financial Times of 30 May 2013 entitled"Consumer Giants Turn Screw on Ad Agencies" written by Andrew Edgecliffe-Johnson in New York and Neil Munshi in Chicago. 

The article broke the story of how Europe's biggest advertisers had unilaterally made the call to start paying their advertising agencies up to six months late. A move started by one company and followed by major advertisers in the developed world, caused serious problems for the ad agencies there. 

The article opened: 

"Some of the world’s largest consumer products groups are delaying payments to advertising agencies and commodity producers for up to six months, squeezing cash flows and causing alarm at critical points in their supply chains.

Mondelez International, the former Kraft snack food group, is extending payment terms to 120 days from July 1 – a decision one advertising executive described as “iniquitous”.

Procter & Gamble, the world’s largest advertiser, this month told suppliers it was pushing back payments from 45 days to 75 days, following similar extensions at Johnson & Johnson, the healthcare group, and Anheuser-Busch InBev, the brewer" 

Pause and think about this for a second. 

First of all this is happening in the developed markets of Europe, who are still reeling from a very expensive global economic crisis. 

Secondly, the move to pay these agencies late is driven by the largest advertisers in the market, who are probably serviced by the largest agency groups, meaning that this is likely to affect the entire marketing and advertising industry in Europe. 

Thirdly, a typical ad agency would have 70% of its costs as people, 15% as property and the balance of the15% being administrative overhead. Salaries are due at least every month (some Europeans pay wages every forthnight). 

Paying these business as late as 6 months after rendering services, creates a huge cash flow problem that forces them to borrow in order to finance their operations until the customers pay. 

The article continues: 

“Once a big company like Procter & Gamble goes public with this, it almost gives permission for other marketers to do it,” said Nancy Hill, chief executive of the American Association of Advertising Agencies. “I fear this is just the beginning.”

“Clients are asking us to take on risk like an insurance company and take on debt like a bank,” she added. “Neither of those are what we were set up to do. Our supply chain is largely people. We have to make payroll every two weeks.”

Bob Liodice, chief executive of the Association of National Advertisers, said he was “hearing screams” from agencies, but was aware of only a few that had turned down accounts because of the new terms. “The process began in the recession when cash management was a critical issue but, like anything, once you start it it’s unlikely you’re going to stop it.”

If large agency networks with operations all over the world are "screaming" at the impact of late payments from the world's largest advertisers, what about the small guy? Can you imagine the impact delayed payments have on SME's? 

The cash flow PINCH felt by the agencies quoted in the article above can be a KNOCK-OUT PUNCH for many entrepreneurs who often cannot borrow the funds required to cover their operations until the "big" clients pay. 

I have heard many stories of entrepreneurs who had designed a unique product, and after many years of knocking on doors, finally succeeded in getting it listed with the big retailers. Though you often find their product on the bottom shelf in the 'specials' aisle these entrepreneurs are not bothered by this and often grateful at the opportunity to have their products in store. However, a few months later the realities of selling to big retailers start to hit home. Payment terms from the big retailers can be horrible, and can put an entrepreneur out of business as he needs to cover manufacturing, staff and logistics costs even before he delivers his stock to the retailer. 

Ironically these large retailers are themselves not short of cash as they do not extend credit to their customers, and collect cash immediately when they sell the entrepreneur's product. Government is no different either. 

Entrepreneurs need to keep their enterprises running in order to create jobs. I plead with you big corporates and government: Pay your suppliers, especially the SME's ON TIME!!! 

For us, it is often a matter of life and death! 

AK