As a corporate controller for several troubled companies and a small business owner for the last 30 years, I’ve worked with a few businesses that went bankrupt, and I’ve used those experiences to help other companies find their way back to a healthy financial status. This post is about strategies for business owners who want to make the best of their often scarce resources in managing their suppliers.
I’m going to define three environments in this series — financially desperate, cash poor, and financially healthy — and talk about bill payment strategies for each in turn. Here, I’ll start with strategies for healthy companies because these should apply to everyone.
Bill Payment Strategies for Financially Healthy Companies
Your company is on solid footing, but you want to see if you can improve profitability by better managing the outflow part of your cash flow. First, I have a question for you: Are you ready for the big deal?
Before you develop a vendor payment strategy, you must consider your need for financing. Attempting to pay upfront costs on a big deal out of your cash flow, no matter how profitable the deal, can be stressful in the best of circumstances and a potential disaster in the worst.
Quite a few years ago, as a software developer, I obtained a commitment from C-level executives of a national hospital chain to purchase my software for installation in all of their hospitals. I committed significant resources preparing for installation and training in each hospital, counting the days and counting the money in advance.
Guess what? The hospital delayed implementation for a year. They were good people, but they also knew the necessity of a flexible financial strategy. I shouldered all of the risk on the deal, and it cost me some pain and suffering. In retrospect, perhaps I should have found some investors willing to share both the risk and rewards.
OK, now you’ve given some thought to an investing and financing strategy to support growth and are ready to maximize the return on the money you pay your suppliers with. For this exercise, I’m going to assume you have good control over the purchasing process and timely approval and recording of vendor invoices.
Often the biggest return is from supplier prompt-payment discounts. For example, you might take 5 percent off for early payment. Can you get this kind of return by holding your money for another 15, 30, or even 45 days? If you can’t beat that return, then take it. If you want to get discounts, make sure you have the processes in place to assure it happens. You don’t have much extra time, so find an easy way to monitor lost discounts. I bet your accounting software has just what you need — mine does.
What’s the benefit to be derived from longer payment terms? The folks at Dell have a great answer to that question based on their early success: They didn’t build computers until they were paid by the customer. They could invest the customer prepayments for 60 to 90 days before paying suppliers for their parts. That’s like a 90-day no-interest loan. Talk about free money.
What about purchase volume discounts? You need to ask if the savings to be derived from larger inventory purchases is greater than the cost of holding these purchases for perhaps longer than necessary. You might also want to weigh the risk of sitting on obsolete inventory.
In my next segment, I’m going speak more to the cash-poor environment about processes to control purchasing, timely approval, and recording of vendor invoices, and how to predict cash flow in order to avoid even temporary insolvency and keep important suppliers.