Quantum Payment Mathematics — When 30 Becomes 90

whatweknow-logoAs a new year dawns, and those of us who operate on a calendar fiscal year analyze 2016 and plan for 2017, I thought it was time to expose an often hidden, but costly practice which is rapidly becoming more prevalent within the industry. Be sure to read all the way to the end for specific practical recommendations on what to do and how to do it.

A little science first:

Even the most basic synopsis of quantum physics, will reveal that it IS possible for something (a sub-atomic particle in most examples) to be in two places at the same time (or super-positioning as the physicists are fond of calling it).

On an ever increasing number of days, it seems as if the invoices we send out are operating in a quantum reality — that is they are in two places at the same time. The first place is the 30 day customary payment terms almost universally accepted (but infrequently written into or stated on an invoice and even less often enforced) as the reference point in most B2B relationships. The other is the 60-, 90-, 120-day or even longer terms that many who get these invoices seem to think they can attach to them despite the fact that no such arrangement was ever agreed to.

So we have the same invoice in two distinct places — a pay within 30 day place (what you expect when you send it out), and a pay whenever we decide to acknowledge the debt place… (which is where it ends up, without your knowledge or — more importantly — your agreement).

How Did We Get Here?

All of the dozens of integrators and consultants I spoke to in researching this issue, essentially put it the same way: “Blame it on the bean counters. They’ve been getting away with this kind of disingenuous behavior as a standard practice, for decades now. Somehow it seems as if they transitioned themselves into a hazy operating cost control and secret profit producing factor, and have quietly taken absolute command of both ends of the cash flow pipe.”
If you’re looking for the beginnings of this rise to power of the “accountants (bean counters in colloquial parlance) running the show” and making life miserable for everyone who is at the outflow or receiving end of the cash flow pipe, look no further than the utterly brilliant ‘float’ scheme secretly created by American Express’ controllers and finally exposed to the light of day in the early 1980s.

Here is how it worked then* and still in an adapted form works today:

The Float’s Time Lag Is the Secret to Everything

It’s the mid 1980s and you buy American Express Travelers Cheques weeks in advance of a planned trip, and your trip lasts a few more weeks. Amex first makes front-loaded income in the form of commissions from the sale of those travelers’ checks to you (convenience fee or some such euphemism), but makes far more income on the time lag inherent in the system. That is the delay between the time you purchased those checks and the time you spent them (which is when Amex or any other such supplier actually has to pay out the money you originally put in).

This delay between purchase and redemption, which could be anything from a modest few weeks to many months later and sometimes never**,  is called “float…” and Amex used this “float” money to make more money. Float money is interest-free to Amex and other sellers of these instruments, but Amex can charge high interest rates to all sorts of borrowers (including the use of float funds in Inter-bank Key rate lending) for the use of float money. The longer the float, the more money Amex and others can make… The company survived fiscal problems that caused many other firms to crash and burn by using this float and combining it with additional float derived from the lag between when you got your card statement and when it paid its merchants (minus a bonus 5 to 6+ percent service fee), which grew from 30 days to 60 days or sometimes even longer.

Staying Afloat in a Late Payment World

Think about it — or ask some of your retired former fiscal management staff. A generation ago (30 years is the generally accepted rule of thumb for a generation) most reasonable clients could be expected to pay their bills within 30 days. This meant from a sound fiscal management perspective that your firm should keep a minimum of one month’s operating expenses in the bank.

In the intervening three decades the default 30 days has become 45 days for no apparent reason other than bean counters perceive they can get away with it. If you supply goods, have you checked recently to see how many  purchasers are taking advantage of the percentage early pay discount — I’ll bet it’s far fewer (if any) than it was even five years ago, let alone a decade — so few that many suppliers have simply stopped offering it.

Every Second of Every Day Billions of Dollars Are Flying Around the Globe

Despite billions of dollars being moved in fractions of a millisecond, globally, every second of every day and ultra-sophisticated spreadsheets and other fiscal tools, it now by some strange permutation of the natural order of the universe, takes two, three, four times longer to pay an invoice, that it once took prior to such innovations.

In one 10-second phone call, I can send a payment in any currency to any bank account in the world, and it arrives literally seconds later. Yet somehow our invoices have managed to avoid this pathway and remain in the days of quill pens, green eye-shades and hand kept ledgers, plus the five to seven days it now takes the USPS to deliver what used to be one to two day first-class mail (for multiple times the cost).

No one ever wants to publicly raise or discusses the inevitable counter reaction to this type of financial chicanery. Well, I will!

Unless I’ve been living in some other dimension, I do not know of any mortgage payment, tax authority, credit card, utility company, parking ticket, gas station, grocery store or overnight plumber that accepts 45 day payments. If you do please let me know where they are.

What happens when that 30 day framework becomes 60 days or 90 days?

Obviously, you now have to bank an additional month of income for every 30 day extension of the pay date just to remain solvent. Without such a cushion, any business will be forced to stop investing in new equipment and infrastructure, training, and other growth oriented expenses. Now whatever it is has to be non-functional to have a chance of being replaced.

The inevitable result of this stretched payment window is that as a business, in order to remain liquid, and meet your own 30 day obligations, you now need to keep two, three or more months of typical income in your bank (frozen to keep a reserve in place), earning some fraction of 1 percent if you’re lucky. This is money you can’t spend on anything safely. Of course, there’s a cost for that: The automatic result is that you and everyone else has to cover the missing available revenue, so rates go up and project costs follow.

I personally watched two very competent, well-regarded engineering/consulting/design firms who got themselves subcontracted to an architect (who had really slick lawyers with negative ethics quotients) painfully go down the drain in exactly this way. A few years later, one of the architect’s principals boasted in a national magazine how he kept his company afloat during the recession by stiffing his vendors. He looked upon it as one of his career achievements. He’s a hero to the bean counters, float experts and ride-the-backdoor-interest-wave crowd, but I think there are some folks out there looking for a rail and some tar!

The Stuff That’s Buried Deep in the Legal Boilerplate Will Never Be in Your Favor

Increasingly, because we represent a small percentage of the overall project budget, the project is structured so that your discipline is a sub to a sub to a subcontractor. Worse still, there’s often a “paid if paid” or “paid when paid” clause buried kilometers deep in the 6 point legalese fine print — so deep that even competent legal contract eagles often don’t see it or find it, until it raises its ugly head.

This is where the shenanigans live and they are never in your favor — even if such clauses are illegal in your state, that does not stop them from being hidden away or used despite their illegality.***

What Can and Should You Do?

First, make sure you have solid, competent legal resources available, should they be needed and invest in having every contract document, form, invoice, letter — anything that talks about payment terms, money or any related issue reviewed and vetted. Be sure you are on totally solid ground before doing anything else. Remember, they usually have more — and more expensive — lawyers than you do, and are perfectly willing to sit back and be sued while you go out of business waiting for a hearing or judgment.

Second, make sure every invoice or other payment document has VERY specific and clearly-stated terms in bold visible print and that you inform anyone receiving such a document of those terms both in writing and through whatever channel you send your invoices (email, etc.).

Be sure to mark the emails, read receipt required or whatever your mail client allows, and be sure to have a record of your informing anyone being billed for anything of the terms and conditions. You never know when you will need the proof!

Third, whatever terms you use be sure to ENFORCE THEM! If you state 30 days, on the 31st day send a polite reminder that payment is due and be prepared to escalate as needed. If you let them slide, they will and the word rapidly gets around that you’re an easy delay pay target! Remember — it really is a small world after all! Finally and most importantly, do not be afraid of asking for what you are owed. Any legitimate client will not have a problem with that. It’s only the sleazy who make it an issue, and you need to ask yourself — do you really want to have to fight for your money every time you do business with that client?

The time you spend doing that is never positive and never will be!

* Imagine hundreds of millions of dollars sitting in Amex’s bank accounts every day, 365 days a year, accumulating interest at the kind of 15-20 percent prime rates prevalent during the ’80s — we’re talking some serious profit margin folks. (Source: American Express: The Unofficial History of the People Who Built the Great Financial Empire by Peter Z. Grossman)

** Estimates vary but the general consensus is that there are at a minimum,  still several BILLION dollars in never cashed travelers checks out there — money which AMEX gets to keep as pure top line profits.

*** What’s legal in any state varies by state — so be sure to check with appropriate authorities wherever you do business to find out what is and is not contractually viable. In some cases this can vary by country or even by city so be VERY careful to check thoroughly and, then re-check using a competent legal professional/advisor, before signing anything.