Credit Matters Blog

Please Pay Us - So We can Pay Them - So They can Pay You

Kim Radok 30 August 2011


Most business people fail to see the inter-relationship which exists within the business community and between each business. We see this attitude when it comes to deliberately slow paying their suppliers' invoices.

The reasons business people think it is okay to slow pay their suppliers are, (i) the advice by others, that it is acceptable to slow pay their suppliers to conserve cashflow, and (ii) the lack of clear thinking or realisation that this is not a cost free exercise.

Let us review whether in fact slow paying suppliers is actually a good business practice.

Delaying payment is often described as a good business tactic to preserve cashflow. What actually happens, is that this only delays the paying out of cash to suppliers for necessary expenses. It does nothing to slow down the cash spent on unnecessary expenses.

I define necessary expenses as those expenses required in the normal course of efficient business. Unnecessary expenses are those expenses which are not required in the ordinary and efficient course of business.

Furthermore, whilst management takes great pains to measure the necessary expenses, this can not be said of the unnecessary expenses caused through slow paying suppliers. These expenses are regularly hidden under 'normal' running costs.

Unnecessary expenses include, time wasting inward and outward telephone calls asking for money, letters, faxes or emails,  duplication of enquiry costs, overdarft interest costs, looking for replacement product etc. What is worse, these unnecessary costs  do not assist you to grow your business. In fact, if anything, these costs hinder the development of the business.

Furthermore, these costs do not include the loss of professional and financial reputation, which is yet another story altogether.

So how does slow paying your suppliers directly affect your business's cashflow negatively?

Well let us go back to the original statement of; PLEASE PAY US SO WE CAN PAY THEM SO THEY CAN PAY YOU. If this is true, the converse is also true. IF YOU DO NOT PAY US WE CAN NOT PAY THEM SO THEY CAN PAY YOU.

Incidentally, another way of verifying the truth of this statement is to refer to your insolvent supplier or customer. What happens to their money which is owed to them? It has vanished and means your business will not get paid one way or another.

In any case, there will  always be a cashflow issue and time cost when you do not pay your suppliers within normal trading terms. One result will  be; your suppliers will have to slow pay their suppliers, who are your customers and then they will slow pay you.

Aother result may be that your business is put on stop supply and you miss a sale and/or lose a customer because of the unavailability of product.

In addition, your unnecessary business expenses will increase, perhaps your professional and professional reputation are damaged and suppliers stop  or reduce your access to credit. We have seen the banks and a number of businesses lately advise, credit is no longer freely available to their customers.

Finally, in these times, it seems even more prudent to pay your suppliers on time. Apart from reducing unnecessary expenses and maintaining cashflow from your customers, it may help to maintain the interest free credit period currently offerred by your suppliers.

May you be paid today rather than tomorrow.

Kim Radok