When we talk about cash flow there is always two sides, the inflows (receivables) and the outflows (payables). These will drive your cash position for good or bad. I have previously talked about the receivable side of things but haven’t touched much on the payable side of the cash flow picture. So I thought it is overdue.
Remember how on previous blogs we pointed out some customers can push the amount they owe you until they want? Well… you can do this to your suppliers (no, we are not encouraging you to do it). The downside of this is that one way or another your suppliers are not going to be very happy about it so it might make you lose reliability within your suppliers and other stakeholders. So how can you push payments further without creating issues with your suppliers?
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Invest in building a relationship with your suppliers:
Building a relationship with your counterparts on the supplier’s office is probably the most important thing you can do. The better relationship you have with the staff at the accounts receivables team at their end the more chances you have to be able to pay a bit later, you need to build a connection with them where they understand your operations, your needs and that you not paying on time is not act of bad faith but rather a way to stay competitive cashflow wise. I am not saying invite them for dinner but you can definitely schedule fortnightly calls when you know you don’t owe money that way they get the impression you always want to be in the good side of the account (which is true).
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Start at a low trading term and build to something better:
We know it is all about the trading terms you have with your suppliers if your invoices are set for 30days or lower then that means that chances are your supplier doesn’t trust your business. However, as you grow your reputation within their accounts receivable department as well as their operating departments you can renegotiate your terms. My take is simple, the first 6 months of your relationship make sure you prioritize the payments to them, even pay early, build a good reputation. Then after 6 months call them and say you are expanding and would like to increase your trading terms (or whatever reason you come up with), they will be likely to extend the terms for you.
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Understand who has the leverage on the relationship:
We have all heard the term “Now we know who is wearing the pants on that relationship”, although this normally applies to personal relations it is not that different in the commercial side of things. There is always one party that has more power over the other, so make sure you know who that is. Make sure you are aware of the strenghts and weaknesses of your supplier relationship, the more you know about it the more you are going to leverage them for your benefit, I know it might sound pretty harsh but sometimes when you are running out of cash because a client is missing payment you need to transfer your risk, by using leverage you can do that.
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Do not over-commit:
Sometimes as business owners we get carried away based on projected sales, instead of actually working on a real-time sales flow we might say “I know this client is going to close and order 40 new items”, which leads you to purchase inventory to sale those 40 items and at the end the client doesn’t close so you end up with inventory that you cannot move. So make sure you don’t overcommit when it comes to purchases from suppliers. It will make it a lot easier.
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Have a forecast:
We have said this a handful of times and our consulting services are very much focused on providing forecasting. Planning and proactively being ahead of the next 3-4 months of both inflows and outflows can make a huge difference for a business, you will be able to see when will you have cash surplus and when you are going to be cash short, and based on that you can make commercial decisions to pay or not pay suppliers within that week. Make sure you are ahead and everything will be a lot easier.
If you keep these points in mind and take action based on them chances are you will be able to have a lot more control of your payables and suppliers cosnequently leading to a healthier cashflow positiong and alignment with receivables and inflows.