Extended terms. It’s not a new issue, nor is it particularly complex for anyone who has been in business for any length of time at all. And certainly, for jobbers who must deal with a variety of financial issues related to inventory investment, aging, valuations as well as shipping costs, currency fluctuations, and the effect of price increases (and decreases) on their financial statements, the terms of payment that they extend to their customers is among the more simple.
And yet increasingly long terms are one of the most persistent and, as a recent report suggests, harmful facets of today’s business environment.
The report, commissioned by the Automotive Aftermarket Suppliers Association and authored by KPMG, called the impact of extended terms a major concern for the health of the aftermarket.
Certainly, as a jobber, you can understand both the benefits of extending this interest-free credit—that is, after all, what “terms” really are—as an accepted method of allowing business to continue and consolidate the payment process (do you really want every customer to be COD?), as well as the risks associated with having too many customers go too long before paying, with the big risk of having some, many, or all just fail to pay.
But, as the KPMG report highlights, the impact goes deeper than your own balance sheet, when extended up and down the supply chain and internationally.
It does not take a forensic accountant to understand that when the payer at the end of the supply chain gets terms, everyone upstream needs to borrow to cover their costs—even if it only means borrowing from profits earned today—and that has a financial impact.
And, says KPMG, these are enormous. Rising interest rates will require the industry to reverse extended terms or come up with as much as $12 billion to fund this business model across North America over the next three years alone.
And, as it would any borrower, the expansion of extended terms means the aftermarket industry is now more sensitive to credit availability and cost. Credit cycles, like economic cycles, are inevitable yet hard to predict. This may be a greater near-term risk than interest rates, says KPMG.
And, not to leave out those in distribution, extended terms can allow you to increase your inventory, but sooner or later you’re going to have to pay for it.
And that, for jobbers and distributors, is the risk-reward equation in a nutshell.
In an industry that has traditionally been very conservative in terms of its exposure to the financial markets, this is new, unexplored territory.
With historically low interest rates embedding themselves into business practices in the same way they have in the personal finance sector (expert pronouncements that historically high levels of personal debt are a serious problem are met with nary a shrug by most citizens), it is perhaps too much to ask that businesses so determined to expand the breadth of their inventories and their customer base pull back.
But perhaps it is time to realize the impact of just pushing blindly ahead down this dangerous road and at least operate with the understanding that suppliers, distributors, jobbers, and the service provider all need to have a truly healthy financial picture for the aftermarket as a whole to prosper.
We can’t afford a subprime-mortgage or banking-sector-style crisis in this industry, but if we’re not careful, we might just find ourselves creeping slowly toward that eventuality.
—Andrew Ross, Publisher and Editor
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