During times of economic uncertainty, payables and receivables become a core focus of any privately owned business. The reason is simple: They govern cash flow.
Instead of trying to provide you with a mathematical or system-based approach to optimizing your cash flow, I wanted to take a step back and have a realistic discussion about your business mindset when it comes to accounts payable. I’ve called it the “Golden Rule of Payables” because we really do want others to treat us well when it comes to our receivables. If we start by doing our part in paying our bills, good things can happen.
Cash flow is king to a business. Without cash, we have to take less optimal steps to run the business. These may include dipping into lines of credit and cutting expenses—which usually includes trimming payroll. Though ugly, these are responsible actions.
But there is another option: financing your business at the expense of your vendors and partners. In street lingo, we call this “riding a vendor” or “partner.” Though ugly, it is sometimes deemed essential. Note the usage of the word “deemed.” In my opinion, this practice breaks the golden rule. Therefore, I’m going to challenge the practice.
My Rule: Do Not EVER Ride a Small Business
One core rule I have in running my own businesses is Do NOT ride a fellow small business owner. I think this is true regardless of what size business you own. Still, riding a small business owner is especially a cheap trick. It is unfair and small businesses aren’t built to deal with it.
You are acting cowardly and not facing the problems in your own organization when you ride fellow small business owners. If you ride them, you force them into your situation, which means payroll cuts and more.
How do you handle it? Be a big person and deal with it yourself. The responsible thing to do if vendors are not helping you make money is to get rid of them. If they are providing revenue, meet their payment terms or renegotiate the terms so they can at least plan for it.
If You Must Ride Someone
When in a martial arts class as a child, it was highly stressed to avoid fights. The instructor would follow, “If you must, take on the toughest one in the bunch. It will make you think about it.”
I feel the same way about payables. If you are going to ride someone, you could probably ride a bank or insurance company but it is kind of like picking on the kid with glasses.
If you were to ride someone big, like a government agency, municipality or family member—all people or entities that will hold you accountable for your actions—the penalties incurred would force you to carefully analyze your business structure and make some hard decisions. These choices could include cutting employees that aren’t producing, moving to new office space with lower overhead, renegotiating outsourced contracts, getting rid of expensive phone systems that no one uses, and putting all of those servers you own into the cloud.
The Benefits of Paying Your Bills On Time
Now that I’m done with my little lecture, let me switch gears and talk about why paying bills on time is a good thing. When you pay your bills on time, you do several positive things for your business.
The first is that you get an accurate view of your cash flow. Second, you are able to evaluate both your vendor and customer bases. On the payables side, you should look to right size your vendors and optimize your expenses. On the receivables side, the part that allows you to pay your bills on time, you force yourself to a) evaluate your payment terms and b) consider implementing penalties for late payment.
Though the implementation of penalties seems harsh, it is becoming common practice in a down economy. There is a hard line between providing goods and services to a customer and being their financing arm. You have the right to consider it. You should approach your customers with facts and have a mature conversation.
Last, vendors and partners value being paid. When you pay on time and meet their expectations, you tend to receive better service. You send a strong message in your company’s community. People will want to work for you. In a world driven by supply and demand, this competition could help you to lower your costs or get more for your money.
Cash flow drives our business world. If your business is challenged by cash flow, get to the bottom of it. Playing games with accounts payable should never be an option. Adhere to the Golden Rule of accounts payable–pay your bills. After all, you like when your invoices are paid on time, don’t you?
Photo courtesy of Daniel Borman under Creative Commons.
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