4 ms·

Not paying suppliers for 300 days sounds extremely exploitative, especially since most of the suppliers are from 3rd world countries. Supporting companies that

Not paying suppliers for 300 days sounds extremely exploitative, especially since most of the suppliers are from 3rd world countries. Supporting companies that have such draconian payment contacts is immoral, there should be a push for more fair payment terms.

trs80 9y ago
Exactly. From the article, "Frees up cash flow" simply means frees up funds for company use that would otherwise have been given to the suppliers. What happens when that money gets invested and returns are not made within the year pay back the suppliers? They are playing a dangerous game.
- TAForObvReasons 9y ago
  It's very clearly "heads I win, tails you lose", and I wouldn't be surprised if the individual contracts were structured to leave no liability to JAB Holding in case they decide to default.
ggg9990 9y ago
The suppliers are often themselves exploitative middlemen in third world countries who use the farmers’ poor price information and lack of capital against them.
gwern 9y ago
> “Our extended payment terms have been in place for many years,” said Becht, JDE’s chairman. “JDE as buyers have paid for the extra costs that go along with the extended pay periods, so this cannot be used as an argument for the alleged extra pressure some trading houses might now be experiencing.” It's just a different way of financing. The interest is built into the higher prices JAB pays.
- charlesdm 9y ago
  It's tax avoidance and balance sheet optimisation. No short term debt on the balance sheet, meaning you can borrow more long term debt. Access to debt is important to these multinational companies, because they generally only grow through large M&A deals. They're rolling companies up into one behemoth. The higher rated the debt is, the cheaper (and more) they can borrow. A lot of developed countries are also introducing caps on interest deductions (e.g. at most 30% of EBITDA per tax year). Since you're paying more to your supplier, which tends to be an at arms length market rate transaction, the entire acquisition cost can just be tax deducted and thus falls outside of the application of said laws.
  - gwern 9y ago
    Neither of that hurts the 'poor exploited little suppliers' pfarnsworth is concerned about, though - balance sheet optimization is irrelevant to them or beneficial in helping JAB & thus increasing demand for their supplies, and likewise the tax thing is neutral or helps them.
    - charlesdm 9y ago
      Most of those businesses however would probably prefer to get their capital back sooner. Unlike large corporations, for a smaller business working capital is generally worth more than the 2-4% interest they can collect on an outstanding delivery for 7 months.
      - deleted 9y ago
        [deleted]
  - scott00 9y ago
    I would expect deferred payment for goods already received to show up on the balance sheet as accounts payable, and would put that in the "short term liabilities" bucket along with short term debt for modeling purpose. I'm skeptical this technique would have any influence on debt ratings or pricing. Am I missing something?

trs80 9y ago

Exactly. From the article, "Frees up cash flow" simply means frees up funds for company use that would otherwise have been given to the suppliers. What happens when that money gets invested and returns are not made within the year pay back the suppliers? They are playing a dangerous game.

TAForObvReasons 9y ago
It's very clearly "heads I win, tails you lose", and I wouldn't be surprised if the individual contracts were structured to leave no liability to JAB Holding in case they decide to default.

ggg9990 9y ago

The suppliers are often themselves exploitative middlemen in third world countries who use the farmers’ poor price information and lack of capital against them.

gwern 9y ago

> “Our extended payment terms have been in place for many years,” said Becht, JDE’s chairman. “JDE as buyers have paid for the extra costs that go along with the extended pay periods, so this cannot be used as an argument for the alleged extra pressure some trading houses might now be experiencing.” It's just a different way of financing. The interest is built into the higher prices JAB pays.

charlesdm 9y ago
It's tax avoidance and balance sheet optimisation. No short term debt on the balance sheet, meaning you can borrow more long term debt. Access to debt is important to these multinational companies, because they generally only grow through large M&A deals. They're rolling companies up into one behemoth. The higher rated the debt is, the cheaper (and more) they can borrow. A lot of developed countries are also introducing caps on interest deductions (e.g. at most 30% of EBITDA per tax year). Since you're paying more to your supplier, which tends to be an at arms length market rate transaction, the entire acquisition cost can just be tax deducted and thus falls outside of the application of said laws.
- gwern 9y ago
  Neither of that hurts the 'poor exploited little suppliers' pfarnsworth is concerned about, though - balance sheet optimization is irrelevant to them or beneficial in helping JAB & thus increasing demand for their supplies, and likewise the tax thing is neutral or helps them.
  - charlesdm 9y ago
    Most of those businesses however would probably prefer to get their capital back sooner. Unlike large corporations, for a smaller business working capital is generally worth more than the 2-4% interest they can collect on an outstanding delivery for 7 months.
    - deleted 9y ago
      [deleted]
- scott00 9y ago
  I would expect deferred payment for goods already received to show up on the balance sheet as accounts payable, and would put that in the "short term liabilities" bucket along with short term debt for modeling purpose. I'm skeptical this technique would have any influence on debt ratings or pricing. Am I missing something?