Comments on: Float That Money! The Politics of Paying Contracts http://www.contractalchemy.com/ethics/float-that-money-the-politics-of-paying-contracts/ Brought to You By WhichDraft.com Wed, 27 Jul 2011 15:37:20 -0700 http://wordpress.org/?v=2.8.4 hourly 1 By: FirstDrafter | Responding to customer demands for extended payment terms http://www.contractalchemy.com/ethics/float-that-money-the-politics-of-paying-contracts/comment-page-1/#comment-2662 FirstDrafter | Responding to customer demands for extended payment terms Mon, 04 May 2009 12:52:56 +0000 http://www.whichdraft.com/wp/?p=53#comment-2662 [...] the customer would get the benefit of several weeks’ extra float on its money. Jason Anderman raises this issue at WhichDraft.com; here’s an edited version of what I responded at his [...] [...] the customer would get the benefit of several weeks’ extra float on its money. Jason Anderman raises this issue at WhichDraft.com; here’s an edited version of what I responded at his [...]

]]> By: Jason Mark Anderman - Simplifying Free Contracts http://www.contractalchemy.com/ethics/float-that-money-the-politics-of-paying-contracts/comment-page-1/#comment-2661 Jason Mark Anderman - Simplifying Free Contracts Fri, 01 May 2009 17:34:44 +0000 http://www.whichdraft.com/wp/?p=53#comment-2661 Great comment, D.C. An analysis like the one you give us above demonstrates how complex negotiations are and how there are many factors that defy neoclassic economic thinking when two large companies put a deal together. Internal politics, leverage, clout, and budget battles loom as powerful influences over what kind of deal will ultimately be struck, particularly, as you astutely point out, whether or not a purchaser can convince the finance department to support shorter payment terms or a price increase. Great comment, D.C. An analysis like the one you give us above demonstrates how complex negotiations are and how there are many factors that defy neoclassic economic thinking when two large companies put a deal together. Internal politics, leverage, clout, and budget battles loom as powerful influences over what kind of deal will ultimately be struck, particularly, as you astutely point out, whether or not a purchaser can convince the finance department to support shorter payment terms or a price increase.

]]> By: D. C. Toedt http://www.contractalchemy.com/ethics/float-that-money-the-politics-of-paying-contracts/comment-page-1/#comment-2659 D. C. Toedt Fri, 01 May 2009 12:43:12 +0000 http://www.whichdraft.com/wp/?p=53#comment-2659 In a sales negotiation where this extra-float issue comes up, the customer's finance department may have decreed that the accounts-payable process will only issue payments on those terms (e.g., net 45 + 90) unless an exception is approved by Finance. If that's the case, the actual buyers may well claim, "we'd love to agree to net 30 days, but we'd have to get approval from those rule-obsessed trolls in Finance, and that would seriously delay the deal." There are a couple of possible come-backs to this: 1. "We'll be glad to let you have the extra float, but since we're not a bank or a finance company, we'd need you to agree to pay interest at prime + X after 45 days." To agree even to this, the customer's negotiator would probably have to get approval from Finance, which by hypothesis s/he isn't likely to want to do. 2. It's sometimes easier to steer the conversation into a discussion about pricing: "The pricing we offered was premised on payment net 30 days. We'd be glad to let you have the additional float if that's what your finance department requires, but we'd need to increase the purchase pricing -- we have to take into account our increased financial risk and the time value of money." The customer's actual buyers can then decide whether they'd rather spend the extra money or go to Finance for approval of net 30 days. (My experience is that buyers would often rather give up the extra float than pay more on the front end.) The weakness in either of these responses, of course, is that toward the end of the quarter, some sales people can be so eager (read: desperate) to close business that they won't hold their ground — this kind of sales person wants everyone else in the vendor's organization to make concessions so they can get their commissions. In a sales negotiation where this extra-float issue comes up, the customer’s finance department may have decreed that the accounts-payable process will only issue payments on those terms (e.g., net 45 + 90) unless an exception is approved by Finance. If that’s the case, the actual buyers may well claim, “we’d love to agree to net 30 days, but we’d have to get approval from those rule-obsessed trolls in Finance, and that would seriously delay the deal.”

There are a couple of possible come-backs to this:

1. “We’ll be glad to let you have the extra float, but since we’re not a bank or a finance company, we’d need you to agree to pay interest at prime + X after 45 days.” To agree even to this, the customer’s negotiator would probably have to get approval from Finance, which by hypothesis s/he isn’t likely to want to do.

2. It’s sometimes easier to steer the conversation into a discussion about pricing: “The pricing we offered was premised on payment net 30 days. We’d be glad to let you have the additional float if that’s what your finance department requires, but we’d need to increase the purchase pricing — we have to take into account our increased financial risk and the time value of money.” The customer’s actual buyers can then decide whether they’d rather spend the extra money or go to Finance for approval of net 30 days. (My experience is that buyers would often rather give up the extra float than pay more on the front end.)

The weakness in either of these responses, of course, is that toward the end of the quarter, some sales people can be so eager (read: desperate) to close business that they won’t hold their ground — this kind of sales person wants everyone else in the vendor’s organization to make concessions so they can get their commissions.

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