Saturday, December 19, 2009
Blog#10 - Farid Maloni - Why Net 30 days, prompt payment?
Since I was absent from my last week blog due to family relocation to Jakarta, I am hoping this week is my week back to the AACE course. But the relocation is not as smooth as I thought before, the know un-know happen. My car relocation delayed, cable TV trouble, several corner of the house need to finalized, the air cond need services, etc… and so on and so on. Like a normal project, my relocation project has a commitment problem from my contractor which requires a “crash” program to bring it back to the track.
Today I want to share my curios about 30 days payment term. I ever download an article about “Net 30 payment” a couple weeks ago for my paper needs. Still mix up in my head on how to correlate on Syariah /and finance Syariah, EVM, usury, and possibly a prompt payment will connected too.
A questions I have about “payment” long time ago (and still my question until today) is why every contract standardizes for company I ever work, always have their GTC (clausal for payment), mention the payment will proceed 30-45 days after invoices received (or good/services received or completed). I also ever have experiences a supplier decline from the list because not agree to the payment term.
Why is should be 30/45 days? Is that purely because of administration obstacle, or is regulated by accounting general practice?
I try to seek an answer at Google engine and this is what I get from as follow:
Net 30 is a form of trade credit which specifies that the net amount (the total outstanding on the invoice) is expected to be payment received in full 30 days after the Goods are dispatched by the seller, or 30 days after the Service is completed. Net 30 is a term that most business and municipalities (federal, state and local) use. Legally speaking Net 30 means that buyer will pay seller in full on or before the 30th calendar day (including weekends and holidays) of when the Goods were dispatched by the Seller or the Services were fully provided. Transit time is included when counting the days, i.e. a purchase in transit for 7 days before. In addition, Net 30 terms are often coupled with a credit for early payment (probably this is cost plus fee?); e.g. the notation "2% 10, net 30" indicates that a 2% discount can be taken by the buyer only if payment is received in full within 10 days of the dispatch of the goods, and that full payment is expected within 30 days. For example, if "$1000 2/10 net 30" is written on a bill, the buyer can take a 2% discount ($1000 x .02 = $20) and make a payment of $980 within 10 days. Net 30 payment terms typically have an interest penalty for not meeting these terms and they begin accruing on the 31st day after dispatch (1)
Reading above explanation, this is the real condition where practically happen in the company. The payment proceeds by company 30 days after the good received or services completed by the contractor.
Compare to experience I have deal with the contractor on Inco site, after the progress claim approved by company, the contractor sent the copy of approved progress claim to their Jakarta offices, then their jakarta offices submit the invoices back to Inco’s sorowako. This is sometime not run very smooths but ‘cause mostly from contractor side, since their take excessive time to prepare invoices and to sent back to us/company. When the invoices received by company’, then the invoices it will get stamp’s “received“by company finance dept; then from it the day was count. The invoices will go around back to the project department to get final approval prior to final payment.
Experiencing, the total days from progress claim approved by company to the payment sent to contractor bank account vary from 25 – 60 days. I can imagine how it will influence the contractor cash flow; and also how the interest will play it roles for the contractor. The longer the payment, the higher interest will be.
Above condition just happen every day and people will think this is a normal way to proceed payment, but until now I could not get the answer “why it should be 30 days?” in the contract term.
In this blog I invite any opinion and I hope Pak Paul (as a Mentor) could give me direction on this.
B/R, Farid Maloni
Cited from (1);http://en.wikipedia.org/wiki/Net_30
Today I want to share my curios about 30 days payment term. I ever download an article about “Net 30 payment” a couple weeks ago for my paper needs. Still mix up in my head on how to correlate on Syariah /and finance Syariah, EVM, usury, and possibly a prompt payment will connected too.
A questions I have about “payment” long time ago (and still my question until today) is why every contract standardizes for company I ever work, always have their GTC (clausal for payment), mention the payment will proceed 30-45 days after invoices received (or good/services received or completed). I also ever have experiences a supplier decline from the list because not agree to the payment term.
Why is should be 30/45 days? Is that purely because of administration obstacle, or is regulated by accounting general practice?
I try to seek an answer at Google engine and this is what I get from as follow:
Net 30 is a form of trade credit which specifies that the net amount (the total outstanding on the invoice) is expected to be payment received in full 30 days after the Goods are dispatched by the seller, or 30 days after the Service is completed. Net 30 is a term that most business and municipalities (federal, state and local) use. Legally speaking Net 30 means that buyer will pay seller in full on or before the 30th calendar day (including weekends and holidays) of when the Goods were dispatched by the Seller or the Services were fully provided. Transit time is included when counting the days, i.e. a purchase in transit for 7 days before. In addition, Net 30 terms are often coupled with a credit for early payment (probably this is cost plus fee?); e.g. the notation "2% 10, net 30" indicates that a 2% discount can be taken by the buyer only if payment is received in full within 10 days of the dispatch of the goods, and that full payment is expected within 30 days. For example, if "$1000 2/10 net 30" is written on a bill, the buyer can take a 2% discount ($1000 x .02 = $20) and make a payment of $980 within 10 days. Net 30 payment terms typically have an interest penalty for not meeting these terms and they begin accruing on the 31st day after dispatch (1)
Reading above explanation, this is the real condition where practically happen in the company. The payment proceeds by company 30 days after the good received or services completed by the contractor.
Compare to experience I have deal with the contractor on Inco site, after the progress claim approved by company, the contractor sent the copy of approved progress claim to their Jakarta offices, then their jakarta offices submit the invoices back to Inco’s sorowako. This is sometime not run very smooths but ‘cause mostly from contractor side, since their take excessive time to prepare invoices and to sent back to us/company. When the invoices received by company’, then the invoices it will get stamp’s “received“by company finance dept; then from it the day was count. The invoices will go around back to the project department to get final approval prior to final payment.
Experiencing, the total days from progress claim approved by company to the payment sent to contractor bank account vary from 25 – 60 days. I can imagine how it will influence the contractor cash flow; and also how the interest will play it roles for the contractor. The longer the payment, the higher interest will be.
Above condition just happen every day and people will think this is a normal way to proceed payment, but until now I could not get the answer “why it should be 30 days?” in the contract term.
In this blog I invite any opinion and I hope Pak Paul (as a Mentor) could give me direction on this.
B/R, Farid Maloni
Cited from (1);http://en.wikipedia.org/wiki/Net_30
# posted by Farid @ 12/19/2009 10:16:00 PM 
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Hi Farid,
Glad to learn your move is complete, if not totally successful!!! Welcome to the world of project management where you own money is on the line!!!
To answer your question, 30 days is the time you can use money from your credit card with no interest being charged. Back in the old days, it took 30 days to hand process everything, so you had 30 days of what is called "monetary float"- which is the time the money was still in my account and had yet to be transferred to your account, even though my records showed the bill had been paid as did yours.
As we move more towards total electronic money, float is measured in hours or seconds and not days.....
The simplest way to show the impact of long term payments is to follow money down the supply chain..... The bigger the company, generally the lower their WACC, while the smaller the company, the higher is their MARR........ Suggest you start by looking those two terms up in your Engineering Economics and essentially, that will form the basis for your paper..... Compare the WACC and MARR for a supply chain which is say 5 levels deep- Government of Indonesia (Pertamina) to INCO or Chevron to Prime Contractor to Subcontractor to Vendor....... Pick a procure and install procedure and then compare the WACC and MARR for prompt payment vs WACC and MARR for longer period payments.
Once you have an example, THEN you can draw the comparisons between Sharia and Regular banking.... How does that sound??
BR,
Dr. PDG, Jakarta
Glad to learn your move is complete, if not totally successful!!! Welcome to the world of project management where you own money is on the line!!!
To answer your question, 30 days is the time you can use money from your credit card with no interest being charged. Back in the old days, it took 30 days to hand process everything, so you had 30 days of what is called "monetary float"- which is the time the money was still in my account and had yet to be transferred to your account, even though my records showed the bill had been paid as did yours.
As we move more towards total electronic money, float is measured in hours or seconds and not days.....
The simplest way to show the impact of long term payments is to follow money down the supply chain..... The bigger the company, generally the lower their WACC, while the smaller the company, the higher is their MARR........ Suggest you start by looking those two terms up in your Engineering Economics and essentially, that will form the basis for your paper..... Compare the WACC and MARR for a supply chain which is say 5 levels deep- Government of Indonesia (Pertamina) to INCO or Chevron to Prime Contractor to Subcontractor to Vendor....... Pick a procure and install procedure and then compare the WACC and MARR for prompt payment vs WACC and MARR for longer period payments.
Once you have an example, THEN you can draw the comparisons between Sharia and Regular banking.... How does that sound??
BR,
Dr. PDG, Jakarta
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