When should you pay suppliers?
When we first look at a business and undertake a review of how to increase cash availability, the first step is to review the aged creditors in detail. There are normally ‘quick wins’ that we can apply right away to make an impact on the business from day one.
Running a good business and building good relationships go hand-in-hand. Having good relationships with your suppliers is so important, given the role they provide to the business. In the false hope of keeping these relationships strong, we see businesses paying their suppliers far too early and before the due date. Why? Maybe they have a personal relationship with the supplier and to keep it solid they pay them quickly, or maybe the supplier is short of cash, and they push for payment before the due date. Often it is not this at all. It is that the systems and procedures in use batch invoices together and pay the batch. Included in the batch are invoices that could be paid at a later date.
Priority suppliers
All businesses have priority suppliers they need to pay promptly. It could be the company’s biggest supplier, and they might be giving you a discount by paying them promptly. Determining which suppliers need to be paid precisely on due date, but never early, and which suppliers can wait is an important component to managing cashflow. You need to fund your business not your suppliers!
To put it another way, your customers will not pay your invoices if they are not properly laid out as they need them or if there is an outstanding query that is unresolved with the service / product. You must apply the same process with your suppliers. Dealing with this important element of your relationship will enable you to maximise your cash availability.
Supplier credit terms
Suppliers offer credit terms of 14, 30 or 45 days or perhaps you have negotiated 60 or more days. These are your payment terms, so don’t pay too quickly and keep the cash in the business. If you have a new supplier it’s not uncommon that you will need to pay up front on the first order and then credit terms will apply after that, at which point you can negotiate longer payment terms and even increase these over time.
Remember, businesses go under because they run out of cash, not because they’re not profitable
Systems and procedures should be in place to ensure that your business is maximising cash management. These will make certain that accounts are paid at the optimum time given all the circumstances. The larger your organisation is, the greater the need is to manage this aspect efficiently, so nothing slips through.
A finance office/ team should review the efficiency every 30 to 60 days, especially with new creditors coming on all the time.
For more detailed information on how CDW Financial Specialists can improve your cashflow, contact:
Chris Wilkinson, Director