The issue of payment terms has always been a hurdle that the industry cannot overcome. In the future, every enterprise needs to deeply participate in it and jointly promote the shortening of settlement cycles between upstream and downstream in the industry, improving capital turnover efficiency.

In 2020, an explosive piece of news for the automotive industry was that Huachen Group declared bankruptcy. An enterprise with assets exceeding one hundred billion, a nationally renowned state-owned large enterprise, an enterprise once thought to be impossible to go bankrupt and collapse, actually did collapse.

There are many reasons for the collapse, but the direct cause must be a cash flow breakdown that made it unable to operate effectively. There may be many reasons for the cash flow breakdown, but it must be that many companies owed money to Huachen, and Huachen also owed money to many companies.

Huachen's bankruptcy shocked everyone who cooperated with large enterprises and was bound by payment terms of three months or even half a year from large enterprises, thinking there was nothing to worry about. The collapse of a belief is enough to awaken those who thought they could get through by pretending to sleep.

This is true for large enterprises, and even more so for small and medium-sized enterprises.

01. Small and Medium-Sized Enterprises Caught in the Middle of Payment Terms

For small and medium-sized enterprises, whether operating online or offline, capital turnover difficulties are a persistent challenge. It is rare to hear of any small and medium-sized enterprise with such abundant development funds that they can afford to purchase financial products. More small and medium-sized enterprises, despite rapid business development and very good profit margins, with accounting showing profitability, often find their cash flow stretched thin.

The main reason is still that small and medium-sized enterprises have small scale. Although some operations are flexible, their ability to digest goods is very limited. To obtain good prices or to meet minimum purchase quantity restrictions, they often need to stock up on large quantities of goods, and limited funds naturally shift to these goods.

Once a batch of goods becomes slow-moving and cannot be turned over quickly, with the main funds tied up in inventory, the enterprise's capital chain immediately becomes extremely tight. At this point, cash flow becomes a sword of Damocles hanging over the enterprise's head, which cannot be said to be without danger.

The situation is equally severe for small and medium-sized enterprises operating e-commerce online. Among small and medium-sized enterprise customers (users), there is an additional role: the e-commerce platform. The platform often becomes the rule maker, generally setting longer payment terms. The merchant's sales need to flow through the platform before returning to their own account. This flow cycle is generally determined by the platform and often takes a long time.

For merchants, how long it takes for customers (users) to receive goods and confirm before transferring money to the platform is one aspect, and when the platform transfers the customer's money back to the merchant's account is another aspect. On both fronts, merchants are quite passive.

Many small and medium-sized enterprises operating e-commerce are often anxious about this: when e-commerce platform performance grows rapidly and urgently needs development funds, half the funds become inventory sitting in warehouses; the other half is goods sold, becoming a string of numbers recorded as accounts receivable on the e-commerce platform.

It's clearly an excellent opportunity to expand the business, clearly could continue, but just feels powerless. Sometimes the difference between receiving payment a day earlier or a day later is the difference between seizing an opportunity or losing it, even between life and death.

Often, when a small and medium-sized enterprise closes down, it's not because the product quality is poor, or the service is poor, or consumers particularly dislike it, but because its lifeline is pinched by the platform's payment terms. At the slightest disturbance, upstream supply chain demands payment desperately, downstream platform won't settle accounts, and the cash flow of the small and medium-sized enterprise caught in the middle breaks directly.

The above is just explaining theoretically the importance of payment terms to enterprise operations. Whether large or small enterprises, whether physical or e-commerce enterprises, payment term issues are enterprise survival issues. This is one of the greatest risks concerning enterprise operations.

02. Accounts Receivable and Accounts Payable

Starting from the fundamental purpose of business, it is to maximize ROI. The so-called ROI is the abbreviation for Return on Investment, referring to the economic return an enterprise obtains from an investment business activity, a ratio used to measure an enterprise's profitability, and a comprehensive indicator measuring an enterprise's operational effectiveness and efficiency.

Analyzing the ROI formula: ROI = Operating Profit / Operating Capital = (Gross Profit + Other Income - Operating Expenses) / (Cash + Accounts Receivable + Inventory - Accounts Payable). Operating expenses here include marketing expenses, fixed expenses, logistics expenses, and financial expenses.

From this formula, we can see that accounts receivable and accounts payable are two important factors determining enterprise operating ROI. With other factors unchanged, reducing accounts receivable and increasing accounts payable will greatly enhance investment returns. These accounts receivable and accounts payable are the concept of payment terms. Therefore, how well an enterprise handles these two factors will determine the final ROI results for different enterprises.

For small and medium-sized enterprises, "accounts payable" represents negotiating power with upstream suppliers, which is obviously difficult, so there is not much room for maneuvering in the accounts payable link. As for "accounts receivable," it depends on the type of customers the enterprise serves. If they are long-term cooperative customers or major customers, accounts receivable management also has little room for shortening payment terms. This is also why, with the same capital investment and seemingly the same gross profit situation, large enterprises still have higher returns than small and medium-sized enterprises.

Therefore, whether based on enterprise operational risk control or investment returns, every enterprise operator must pay high attention to payment term issues. Payment terms must be managed at a level relating to enterprise survival and maximum interest returns.

Yet this important operational indicator and operational element is precisely being overlooked by the vast majority of operators in the actual automotive parts distribution industry.

03. The Lifeline of Auto Parts Dealers——Shortening Payment Terms

The automotive parts distribution industry has its own special characteristics. The vast majority of enterprises in this industry are small and medium-sized enterprises. The industry concentration is extremely low, so low that even various platforms, whether traditional auto parts traders with 20-30 years of operation or internet platforms with tens of billions or more in financing, have a total market share that doesn't reach 1%.

More are enterprises with annual sales between 10 million to 100 million yuan, true small and medium-sized enterprises. Enterprises in this range with larger absolute sales values are mostly comprehensive auto parts dealers operating original parts, international major brands, and domestic brand parts, mixed with a small number of independent brand dealers.

Whether comprehensive auto parts dealers or independent brand dealers, facing the complex SKU quantities of automotive spare parts, within limited inventory of several million or tens of millions, the sales volume for each specific SKU is very small.

Therefore, when dealers face upstream suppliers or factories, they lack the ability for large-scale procurement and naturally have no negotiating power. If it's a main machine factory central warehouse or 4S shop order substitution channel, there is even less negotiating ability. On payment terms, they can only rely mainly on payment before delivery or cash on delivery, plus a small amount of short-term payment.

For dealers handling imported original parts, they need to make advance payments before foreign suppliers are willing to ship. Considering long-distance sea shipping time, there even appears the odd situation of doing one million in business while needing three million in inventory funds: one million advance payment for orders, one million floating on the sea, one million sitting in the warehouse.

Auto parts dealers facing downstream——whether repair shops or distribution channels——because of widespread after-sales issues in the industry, inability to precisely trace goods to guarantee quality, need to provide support to downstream partners for stable cooperation, and fierce competition, basically all have payment terms, ranging from one month to two or three months.

For auto parts dealers, after a year of hard work, the inventory count might show considerable profits, but they can't see actual cash——most profits are in accounts receivable, with the remainder in inventory.

In the five or six years since entering the auto parts industry, every year-end, WeChat moments often show various collection demands, with many even making harsh threats: today you're still a friend if you settle, after today you're blacklisted if you don't settle.

After going through countless difficulties, most customers will pay, just with some discount attached. For example, if owed 8,690 yuan, transferring 8,000 yuan settles it. This practice is quite common in many regions, called "rounding to a whole number and it's done."

Poor auto parts dealers, probably earning only ten or eight percentage points, and "rounding" directly clears their profits. Considering various hidden costs, auto parts dealers might actually lose money. In similar situations, auto parts dealers often have no choice but to accept it.

From upstream procurement to downstream customers, while the existence of payment terms brings convenience to all parties, it also forms numerous crisscrossing triangular debts and debt chains. Any delay or inability to pay at any link affects the normal operation of the entire chain.

With the outbreak of "black swan" events like the 2020 pandemic, many enterprises fell into operational difficulties. Capital chain issues became prominent, payment terms couldn't flow smoothly, and calls for reduced payment terms, cash flow concerns, and debt issues became the focus of more dealers' attention.

Surrounding payment term topics, in every business cooperation it is a top priority: not only to sell goods, but more importantly to collect payment. Many would rather sacrifice some profit to get payment faster. Facing e-commerce platform cooperation, some dealers even had to resort to so-called platform supply chain finance, paying high costs to recover payment to ensure cash turnover.

The entire auto parts industry urgently needs a better payment term solution, making the entire transaction chain operate more healthily and safely, reducing operational efficiency losses caused by chain debts.

The solution to payment terms is not to replace it with cash, but to shorten payment terms, shortening them to make the entire transaction chain similar to cash settlement status, while avoiding the inefficiency of cash settlement.

In March this year, Baturu launched a 7-day zero-fee settlement plan for suppliers. All transaction performance brokered on the platform can have payment settled within 7 days. Payment reaches the supplier's designated account within 7 days and can be freely withdrawn. Considering the necessary time for reconciliation during this period, 7-day settlement is basically equivalent to cash settlement. It has the efficient capital flow of cash settlement while avoiding the inefficiency and hassle of cash settlement.

For suppliers, it eliminates the pain of chasing customers for payment, eliminates profit losses from settlement discounts that may occur in offline cooperation, eliminates after-sales troubles of offline customers using debt to coerce handling of non-product quality issues, eliminates the cost of paying high annualized interest rates for advance settlement……

Thus, suppliers achieve rapid capital turnover through efficient settlement, and gradually gain the advantage of supply prices from buying goods with cash from upstream suppliers. From a long-term value perspective, this can gradually improve enterprise operational health.

Payment term issues have always been a hurdle the industry cannot overcome. In the future, it still requires close cooperation between enterprises to explore more efficient solutions beneficial to industry development. I believe every enterprise needs to deeply participate in this, jointly promoting the shortening of settlement cycles between upstream and downstream in the entire industry, improving capital turnover efficiency, enhancing cash flow stability, so that the entire aftermarket transaction chain can operate more healthily and safely.

According to Deloitte's "2020 China Automotive Aftermarket White Paper" data automotive aftermarket maintenance market is expected to reach 1.7 trillion yuan by 2025. That is to say, in the next 5-10 years, the aftermarket will enter a new perio. To achieve healthy and sustainable development of the aftermarket industry and each individual enterprise, it cannot be separated from benign cooperation of capital flows among all roles in the industrial chain.