Small Business Ru!e of the Month

Small Business Ru!e of the Month

01.11.2019 Your Suppliers Are Not Your Bankers

Keeping money in your bank account to save overdraft costs is a good thing. I agree. Stretching out payments to your suppliers as long as possible keeps money in your account, so it must also be a good thing, so the argument goes. Here I disagree with almost every bean counter in the world.

Fast supplier payment is a great indication of the health of a business. There are only two reasons that a business does not pay its bills on time. The first reason is that the business simply does not have enough money. Not only is this a bad message to send to the marketplace, but you can also end up in jail for trading while insolvent. Confidence in your business is critical. If the marketplace thinks you don’t have enough money to pay your bills, clients will lose confidence in your business.

The second reason that people don’t pay their bills is that they are plain mean. Some people like to keep money in their account for as long as possible—which is simply not fair to suppliers. People want to deal with nice people rather than mean people.

If you have cash flow issues, then address the root of the issue rather than use your suppliers as your banker. If your clients are taking too long to pay your bills, then put strategies in place to address this—either with payment incentives or a better debtor follow-up system. If you simply need more cash to run your business effectively, then borrow the money from your bank. Let your bank be your banker (it seems obvious, I know).

Time and again I have seen the goodwill generated with suppliers, and the extent to which it saves you money, far outweigh a few dollars in interest.

We had an incident recently where a major supplier, the largest IT distributor in the world, allowed us to return a component worth $20,000 when it was outside their returns policy. We could easily have been left holding a white elephant. When they gave us permission to return the product, they cited our payment history as a major factor in allowing the return.