Every day it seems we hear about the Enron, Worldcom, ImClone and other “big business” ethical violations. There is no denying the significant impact on millions of people and the financial markets. However, there is a business practice that I’ve witnessed as part of “cash management” in numerous businesses, big and small, that creates on-going, far-reaching repercussions in the economy.
You may not have thought about it from this perspective, but I’d like to challenge you to re-evaluate what is a common business practice – not paying your vendors on time, for the amount due, or if you’re late, not paying the finance charges. How about a few examples of real life situations, maybe you’ve experienced them:
- “You’ll get paid, when I get paid.”
- “We never intended to pay them. By the time they can get us to court, they’ll be out of business.”
- “I don’t care what the terms were. We’re big enough, that if they want our business they’ll be happy to get the money when we decide to pay them!”
Did any of these sound familiar to you?
For many businesses that file bankruptcy, it isn’t profitability that is the issue. It is having the cash to run their business. When your clients fail to pay you, what happens to your ability to pay your vendors? Feel the squeeze?
In service businesses, there isn’t a lot that can be done about reclaiming the asset – once rendered the service can’t be taken back. One colleague likens it to a magician revealing how a trick is done, once shown it can’t be undone.
What can be done is to reiterate the terms and conditions and pursue collection actions. (Here are some of the options: demand letters, small claims court, litigation, and collection agencies.) But those take time and additional money to pursue, time that won’t be spent on providing additional services (revenue). It doesn’t mean that I don’t pursue the outstanding accounts, but it does mean that I incur additional costs of lawyers, accountants and other administrative support to take care of the collections.
What also happens when companies can’t collect their legitimate debts? Prices rise, businesses fail, people lose jobs, and so on and so on and so on. The effects ripple out from each pebble dropped into the proverbial business pond. This affects everyone on an imperceptible level.
The reality is that due to circumstances – perhaps one of your clients not paying a bill – you may get strapped for cash. Instead of simply letting an outstanding invoice go past due, give your vendors a call and explain the situation. It’s better to let them know and be honest than to surprise them by not paying.
Keep in mind the following:
- In these days of electronic payments and commerce, bills that people commonly floated – utilities, phone, etc. – have little tolerance for late payments. It just takes a flip of the switch to cut off the phones to your business.
- When dealing with delivery services, late or non-payment of invoices can get you on pre-paid, cash only status pretty quick.
- Credit ratings can get damaged quickly. Qualifying for new credit with new vendors takes sound credit scores and references. This is an “asset” you don’t want to lose, so monitor your transactions and spending rates. Don’ overextend your operations and not be able to pay your bills on time.
There will be an occasion when you need to be late or pay less than the total balance of an invoice. Be prepared, be honest and have good relationships with your vendors and they’ll usually work with you.
Some additional points to keep in mind:
- Negotiate the terms that you can meet.
- Don’t spend more than you can afford.
- If you can’t meet the terms you agreed to due to a sudden change in business, call your vendor and discuss the situation. By not surprising the vendor and being honest about the situation, you can maintain a sound business relationship.
- Pay bills when due. Consistently paying bills late (or not at all) can lead to credit ratings that put you on cash only terms with numerous vendors.
- Remember that your vendors have lots of other customers. They can be a huge positive referral source for your business – if you treat them with respect.
- If your cash isn’t keeping up with your expenses, it’s time to evaluate your operations. Are you growing too quickly? Operating inefficiently? Are your incremental costs to high? Are your prices too low?
If you can’t pay your bills on time and in full, it’s time to analyze your operations and determine what needs to be changed.
Copyright © 2004 Lea A. Strickland, F.O.C.U.S. Resource, Inc.