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Alliance Boots New
Trading Terms
In a letter of 31st January
2008
allegedly sent
to a number of suppliers, the
Alliance Boots Integration Finance Board have announced their decision to
standardise UK payment terms for invoices, for goods and services purchased from
suppliers, dated on or after Tuesday 1st April 2008.
These terms will provide for payment 75 days from the end of the month of
invoice, and will further provide for the application of a settlement discount
of 2.5% of the invoice value before VAT.
All other terms and
conditions of business will remain unchanged.
Implications:
Alliance
Boots: Impact of the new terms on a ‘typical’ UK supplier
A ‘typical’
supplier with annual sales to AB of £10m, ex VAT, Net margins of 9%, and
currently being paid in 45 days with no settlement discount.
Credit period:
The new terms mean that on average, invoices issued mid-month will be paid in 90 days, i.e. an additional 45 days.
This means that the supplier will be paid 4.05 times per annum (365/90).
The average amount owed by the customer will be £2.469m i.e. twice the amount currently outstanding.
The additional average amount outstanding will be £1.234m.
Assuming the cost of credit from banks is 7%, then the cost of funding the additional credit will be £86k.
Given the supplier’s net margin of 9%, the incremental sales required to recover the additional funding will be £955k i.e. £86k/9 x 100.
(NB. if the supplier uses an Internal Rate of Return of 18% instead of bank cost, the incremental sales required would be £2.468m)
Settlement Discount:
A 2.5% off-invoice Settlement Discount is effectively £250k additional payment on a year’s sales of £10m.
Given the supplier’s net margin of 9%, this means that incremental sales of £2.7m would be required to generate £250k.
Thus in the case above, the supplier would need to generate incremental sales of £3.6m to cover the additional costs of the new trade terms.
NOTE: All facts and figures are presented in good faith and on the basis of information before us at the time of release. In consequence, no advice, interpretation, or implication should be acted upon without the undertaking of normal commercial precautions.
To evaluate the impact upon your business see NamCalc and the new NamCalc workshop
To factor these changes into your AB strategy, see the Managing Alliance Boots workshop
Namnews - Tuesday 5th February 2008