Why do some large companies expect vendors to fund their cash flow?
For many businesses – large or small, giving credit is the kiss of death!
Buyers want credit because of THEIR cash flow problems and are hoping that they can sell your product before they have to pay you. This doesn’t always happen and you end up losing twice.
1. You no longer have the product that you can sell to someone else; and
2. You do not have the money for that “sale” in the bank so you can buy more product to sell.
If a business is selling plenty of products or services and buying labour and parts at the right price how is it possible for it to go bust?
Cash flow (or lack of it) is more often than not the reason why so many businesses fail. Profits can’t be spent until they are collected. Obviously it’s important to sell at the right price and create the maximum amount of both gross profit and net profit. If you don’t focus on collection though your business won’t last very long. Cash is the lifeblood of any business, and if it isn’t flowing at the right place at the right time, this can cause real headaches for the business owner.
Getting cash into the right place at the right time, means having it in your bank account for more of the time, and not that of others. There are many places your cash can be other than in your bank account, such as
- Customers who haven’t paid you yet
(the money is in THEIR bank account)
- Suppliers you have paid too quickly
- Stock – surplus or slow-moving
- Work in Progress – work not invoiced
- Plant and Equipment that could be leased
- Excessive overheads and costs
Let’s briefly discuss some of the above and how you could get the cash moving back into your bank account quickly.
Customers who owe you money are more important than those who don’t! It’s much easier to get money out of customers you have already sold to than new ones. Many business owners feel uncomfortable about debt collection. If this is you, get someone else to do it. It may seem expensive but it’s much more expensive to have your cash funding other people’s businesses. Outsourcing Accounts Receivables or training someone to do it could cost very little compared to the outcome. If done properly it could put much more working capital back into your bank account.
Suppliers often get paid too quickly. You’ve heard the term ‘The squeaky wheel gets the attention”. Many bookkeepers will get a payment authorised immediately for a demanding supplier or worse still, as soon as the invoice comes in. This can play havoc with your cash flow. It should be you as the Company Owner making the payments, not anyone else. You need to use up all of the available terms and negotiate better ones if you can. It can pay huge dividends to spend a bit of time investigating other suppliers and better payment terms. Personally, I think this approach is as bad as giving credit. You are asking someone else for credit and putting yourself in the position of being taken to Court if you can’t pay on the due date. As a Lender they have significant control over your business, and under most countries laws they have a “lien” on your business until such time as the credit has been paid. They can force you into Bankruptcy Court anytime they want.
It may seem strange to consider stock as cash but it is. Just think of it as fifty dollar bills piled up in your stock room. Do you have any methodology behind your stock purchasing? Many businesses buy when the sales representative calls in or if they get offered a discount. You should buy stock when it suits you and your needs not those of your supplier. Discounts can also be a big trap. Ask yourself why are they discounting? Do they know something you don’t? Is there a new product coming up that will supersede the existing one? You need to measure the cost of having that stock sitting around sucking up your precious working capital against the discount being offered. It may be tempting to swap cash flow for potential increased profits but if it’s going to cause you cash flow problems perhaps it’s not worth it.
Work in Progress can be a real hiding place for cash. If you have many jobs on the go at once, it can be very hard to manage them all to a point where they can be invoiced. There can be all kinds of hold ups, such as slow parts delivery, labour problems, getting access to job sites etc. If you are trying to do this manually, or in your head without any process, it can cause you real headaches and cash flow problems. A simple job management system can save lots of headaches.
If you do a very quick estimate of how much money you have in outstanding customer debts, suppliers paid too quickly, excess or slow-moving stock and work not invoiced, you may find it’s worth spending a little time and money getting these four areas sorted out. It could put tens of thousands of dollars back into your bank account, not just today but for the future. It could really reduce your headaches and sleepless nights worrying about cash flow. It could also reduce greatly your interest bill.
A better solution is not to give or ask for credit.
As a company we do not give credit irrespective what carrots are dangled in front of us. We regularly turn down orders because the customers wants 30, 60, 90 or even more days credit. They tell us they can’t give us the business if we don’t give them credit. This tells us straight away that they have a cash flow problem and want to use our money to solve it. In fact many years ago when I was a Consultant, one of the Company accountants for whom I did the work, told me when my account was over 6 months overdue that normally by then the people they owed money to had folded, and then they never had to pay. This was a 7 day invoice, and it took me in excess of 6 months to get paid and even then it was the organising of a Court date that forced the payment. Needless to say, I refused to do anymore work for that Company.
Shakespeare said this in a soliloquy by Polonius in Act I, Scene 3 of William Shakespeare’s Hamlet.
Neither a borrower nor a lender be; For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry. This above all: to thine own self be true, And it must follow, as the night the day, Thou canst not then be false to any man.
This is just as true now as when it was first written. After all it was only a few years ago that the amount of credit in the world nearly destroyed the world economy, and many small businesses disappeared for ever.
Buyers want credit because of THEIR cash flow problems. If they go bankrupt then you lose, and if you go bankrupt then they win and you still lose.
When buyers want credit, you are better off keeping the stock in your control rather than give it away to someone else on a promise that they MIGHT pay you at some time in the future.
Being in business means looking after yourself first each and everyday, and ignoring the temptation to gamble on your livelihood by entertaining those Companies whose Buyers want Credit.
In February 2015 Walmart announced that it raised its lowest level employees’ wages to almost a living level.
In March 2015 Walmart required all their suppliers to reduce their prices to Walmart by 10% – thereby moving the costs from Walmart to the suppliers who will just have to peddle harder to stay in the same place. I wonder how many of these small suppliers will go out of business because of this.