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Net 30 argument - check my logic?


Okay, I'm working for BigITCo, which has a contract with the government agency I'm working at. I'm an independent contractor.

BigITCo's payment methodology:
1) I fax my timesheet to them.
2) They fax my timesheet *back* to me, with an approved signature. This used to take 24 hours, lately it's been days.
3) I then take that faxed timesheet, prepare an invoice, and mail it to their accounts payable office.
4) Their accounts payable office "processes" it, then puts it in their system.
5) My check is cut the first check processing day *after* the 30th day after the payment was entered in the system.

I fully recognize the concept of "float" and I'm sure this was put in place because some beancounter did the math and told an executive "for every day you can postpone paying every contractor, we earn eight bajillion dollars in interest"

The problem is that I cannot wait to find a job that won't wait six weeks to pay me. In retrospect, the worst place I ever worked (atmosphere wise) paid me upon receipt of the invoice, and I'd rather work there than here.

I figure since I'm here and have no emotional investment, I'm going to keep railing against the system. My latest thought:

1) Based on $50/hr and 6% return, they earn $40/month per contractor on float.
2) *Every* contractor here gripes about the pay situation. Two have left solely because of the pay situation.
3) If just one contractor leaves because of pay, that's $8000/month lost income for BigITCo (based on a billing rate of $100/hr).
4) It will take 200 contractors' float to make up for the lost income from that one departure.  This does not take into account lost referrals or lost business due to unhappiness with BigITCo.

My sales pitch to attack this - "Would you pay $40/month per employee to eliminate the #1 complaint and reduce turnover significantly?" If they answer "yes" to that, then the suggestion is "treat timesheets as invoices and pay upon receipt" - IMHO if they did that one simple thing people would LOVE working here.

So where are the flaws in this argument?

Philo

Philo
Wednesday, April 02, 2003

I don't know a lot about banking, but 6% for a short term interest rate seems high. 

Joe Blandy
Wednesday, April 02, 2003

I would understand it if the company is a bank or Visa or some other business doing a huge amount of financial transactions every day. You just proved your employer looses money and they still insist on the arrangement?

Thomas Eyde
Wednesday, April 02, 2003

I think 6% is low for short term interest.

If you're a contractor, then I assume you have a contract?  Payment needs to be specified there.

 
Wednesday, April 02, 2003

Maybe that's just how long it takes. Assuming that situation arose from some legitimate process, think about how difficult it would be to sell a project to modify it.

pb
Wednesday, April 02, 2003

The interest on the float isn't the important part, it's the fact that they have a standing amount of money that isn't theirs in their bank account.

Starbucks, for example, has a standing loan from all the people who bought into those prepaid coffee cards.  I think I read somewhere that based on the numbers, their standing loan was something like $500,000,000

aa
Wednesday, April 02, 2003

aa, but absent a business need for cash reserve, doesn't that just cater to the egos of the management? Is there an honest business reason to simply have money sitting in the bank (note - it's not a real cash reserve; under accrual accounting it's not there)

Philo

Philo
Wednesday, April 02, 2003

Assume they go for it: what happens in the month they decide to switch? They will effectively double their expenses for that month.    Most companies cash flow positions won't like that.

Is the money really just sitting in the bank?  How soon are they paid by the government?

Not that the situation isn't lousy ... but once you are in the system if it stays at a constant through put there seems to be little to be gained by leaving.

... and I'd _love_ to know where I can get 6% on short term deposit??

Rob Walker
Wednesday, April 02, 2003

Unfortunately the whole Net 30 scam is totally standard operating procedure by big companies in this country. Every time they figure out a way to delay paying all their suppliers by another day, they earn a windfall cash profit equal to a full days' spending.

If you have negotiating power (i.e. if you can get together with the other contractors) you may be able to get Net 15 terms. This is something they can plug into their accounting system easily. Changing the way invoices and timesheets work is going to be more difficult for them, but changing the terms from Net 30 to Net 15 should be a simple flip of a switch. Alternately if you really care about time-value-of-money, you can offer a 1% discount if paid within 15 days, and they'll almost certainly do it because nowhere else can they earn 1% in fifteen days.

Realistically, interest rates are about as close to 0 as they've ever been, so I wouldn't make too big a deal about this. Get one of those 0% intro rate visas and you shouldn't care when you get paid :)

Joel Spolsky
Wednesday, April 02, 2003

pb -
The solution is absolutely simple from a technical standpoint (and makes the workflow much simpler). My proposed solution (as I mentioned above):
1) I submit a timesheet. That timesheet can be considered a legal invoice.
2) BigITCo receives timesheet, authorizes it. They then forward a payment memo to Accounts Payable.
3) Accounts Payable enters payment due into their system, which processes it accordingly.

All I've done is cut the byzantine "fax the timesheet back then mail in an invoice" crap.

Philo

Philo
Wednesday, April 02, 2003

Does your contract with BigITCo stipulate the payment terms.

If not, then an idea would be to fax an invoice at the same time that you fax an invoice, and let them do the gruntwork. On the invoice, you would stick a big ....  PAYMENT DUE IN 15 DAYS.... in red!

Those drones in accounts payable will usually follow the letter of the invoice unless told otherwise.

Oh yeah, on the back of the invoice, state that all late payments will be met with a monthly interest rate of 2% or so (yup 2% per month).

If you can get them to accept these invoices a couple of times where the contract terms do not stipulate payment terms, then you set a precedent (IANAL), and that is always a good thing.

tapiwa
Wednesday, April 02, 2003

Lesson for the masses - never assume...

The contract stipulates that invoices are payable "net 30 days after receipt by BigITCo"

I don't have a problem with Net 30 (obviously). I don't even have a problem with Net 30 after receipt.

I have an issue with "Net 30 after receipt but you can't submit until we tell you to and we really don't 'receive' it until we've processed it, so it's really more like net 45"

Though I figure if I'm attacking the situation at all, I might as well go for broke and "pay upon receipt" [grin]

Philo

Philo
Wednesday, April 02, 2003

Aren't you the guy working on the law enforcement application with the blog?  Sounds to me like you have too much time on your hands and that you surf the web more than you get work done.


Wednesday, April 02, 2003

Hmm.  BigITCo = EDS maybe?  Just a guess.  Big companies are wasteful, gov't orgs are wasteful, put them together, and everybody's sitting around billing for $100/hr.  Great strategy.

Hmm.
Wednesday, April 02, 2003

Just switch over to accrual based accounting for your business and your problem is solved.


Wednesday, April 02, 2003

It can actually get worse than this.

We just did a small job for a very large computer company whose name is 3 letters.  Even though we were the guys extending the "credit" so to speak, they dictated the terms:

- Net 50

- 2.5% transaction fee deducted from our invoice.

So they pay us in 50+ days and charge us 2.5% to cover the cost of processing our invoice and cutting the check.

If you think that is bad news, one of the automobile companies in Detroit whose name is commonly referred to by two letters is even worse.

Mitch & Murray (from downtown)
Wednesday, April 02, 2003

M&M

If a company wanted to charge me 2.5% for paying my invoices, I would make them earn it.

Raise a daily or hourly invoice... pretty easy to set up an autogenerate. Irritate them into waiving the 2.5%. Shawshank redemption anyone??

Sure it might cost a few more pennies in postage, but 2.5% per invoice adds up to a quite a bit of $$.

tapiwa
Wednesday, April 02, 2003

>Is there an honest business reason to simply have
> money sitting in the bank

Sure, you can spend it on buying stuff, hiring people, whatever you want.  Or it can be a cushion if times are hard.

> (note - it's not a real cash
> reserve; under accrual accounting it's not there)

While it might not be there under accrual accounting, it's sitting in the bank in a very real way.  As long as it's a standing float rather than one-time, it's sitting right there, ready to be used for whatever you need.  Of course it would be easy to over-extend yourself if you weren't careful, as it's not really there long-term, just short-term.

But even if you just left it there, it's still better to have a spare $100,000 than not to have it.

aa
Wednesday, April 02, 2003

Philo, even if it's simple technically (which I highly doubt) it's not remotely simple operationally or financially, etc. , etc.

The techies have to realize that there's more to everything than tech.

pb
Wednesday, April 02, 2003

Net 30 is the standard pretty much....

Joel's idea of giving that 1% discount sounds good..you should factor that into your rate for your next gig...

Prakash S
Wednesday, April 02, 2003

pb - trust me, I am *well* aware of human factors engineering in proposing solutions. My only thought on "simple" is that I will be absolutely shocked if there aren't *already* payment memos moving from contracting to Accounts Payable.

I'll also be amazed if they have every single contract on the same terms - they're not always the big guys and probably actually negotiate a lot of their contracts, so they probably have everything from "payable upon receipt" to bizarre combinations of discount rates and late fees.

The machinery is *there* - I just hope to leverage it to my advantage. [grin]

Philo

Philo
Wednesday, April 02, 2003

If it is not in your contract that you have to submit for signature first, then fuck 'em. Send the invoice by registered mail as soon as you calculate it, I see no reason why you need their permission to invoice them, since they gave you that permission when they signed the contract.

If it is not in your contract that you bill per month, then start billing every week, and if they make a fuss send the next invoives daily.

Put the debt into the hands of an agency who will collect it. They effectively pay you X% and then collect the whole lot from BigITCo. I would be very surprised if they are not _much_ better at getting paid than you, though it will no longer be your concern.

(All of these options are likely to piss off BigITCo. I don't know how much you want to do that, so use with caution!)


Thursday, April 03, 2003

Offering a 1% or 2% discount for payment in 10 days used to be common.  The problem was large companies would take the discount and still pay in 30 days.  Over time this discouraged the practice, and I haven't seem much of it in years.

Mitch & Murray (from downtown)
Thursday, April 03, 2003

As I have mentioned before in some specialized verticals where consultancies vy for the jobs of a few big clients, not getting paid for over a year is nothing unusual.
What are you going to do? Sue one of a very limited set of potential clients? It is something you know and account for in those sectors.

Just me (Sir to you)
Thursday, April 03, 2003

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