Discover Why You May Not Want to Follow Conventional Wisdom for Payables
By Peter Lyle DeHaan, PhD
The standard business advice when it comes to accounts payable is to delay payment as long as possible, even beyond the stated due date—assuming you can get away with it. This benefits cash flow, making more money available for day-to-day operations. This may be shrewd business, but it’s not good business.
Although lengthening payables may make sense from a money standpoint, it may not be the best overall strategy. Here’s why:
Build A Buffer
A business that mails payables at the 30-day mark or pushes payments beyond that, say perhaps to 45 days, has no cushion when cash flow gets tight and there’s not enough money in their account to pay all the invoices that are one month old.
A business that pays invoices quickly, perhaps in one week, benefits by establishing a buffer for those times when they can’t pay as quickly. After all, what vendor would care—or even notice—if they received your payment in ten days as opposed to the usual seven? Having a policy of paying invoices quickly whenever possible, builds a buffer for those times when remitting payment suffers a bit of a delay.
Some businesses readily agree to their vendors’ terms of service, such as net 30, knowing they have no intention of ever following through. Yes, they will pay, but it will happen when they want to and not according to the agreement they committed to with their vendors. This is not an ethical policy. Stop doing it.
Reduce Needless Interruptions
When a business pays invoices late, even by a couple days, they receive collection calls. Each call about a late or missed payment is an interruption to the person receiving the call. Now multiply this by every vendor you work with. That’s a lot of employee time spent dealing with an avoidable problem, and it diverts them from work that’s more important and more profitable.
Become A Preferred Customer
Whenever I have a special promotion who do I contact first? It’s those who pay their bills quickly, followed by those who pay within 30 days. I never consider customers who pay late and cause me extra time chasing down the payments that they committed to make. In short, becoming a preferred customer has rewards, while those who pay late end up on a different list.
Of all my optimize articles, this may be the least acceptable. I get that. But consider your accounts payable policy and how that affects your vendors and your staff. Granted, you can’t immediately go from paying in 45 days to paying the day the invoice arrives. But you can move in that direction. First, take steps to make sure all vendors are paid within the timeframe they expect and that you agreed to.
Next, consider incrementally shortening your payables cycle one day at a time. Keep working on it until you can pay every invoice quickly. The ultimate accounts payable streamlining will occur when you can pay every invoice on the day it arrives. Your vendors will appreciate it, and your staff will respect you for it.