When business is going well, it can be tempting for business owners to get ahead of things.
Perhaps they might want to pay some staff early, or pay suppliers immediately after they’ve received a shipment. It seems to make perfect sense – like paying your own personal bills when they hit your inbox.
But according to accounting experts, paying bills early is just a poor use of money. But more importantly, it signifies a problem that many businesses have overall: getting clients and suppliers to agree to more flexible and beneficial payment terms.
“Rather than just paying your creditors in advance, this whole concept is wrapped up in the idea of better managing stock, creditors and debtors together,” says Michael Stapleton, founder of Pro Veritate – a financial consulting business.
Stapleton says while businesses with extra working capital may be tempted to pay suppliers early, it’s not usually a good use of money.
“If you pay your creditors faster, that increases the value of your working capital – you need more money to operate,” he says.
“Most businesses don’t have loads of cash.”
“I’m a big fan of small businesses negotiating the best terms they can from their suppliers, whether that be you can pay them in a month’s time or two months, and sticking to that agreement.”
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Stapleton says that negotiating payment terms depends on the business and each specific case.
“It’s just a commercial negotiation,” he says.
Stapleton suggests that if you’re going to buy from a supplier regularly and it’s of reasonably high value of ongoing purchases then you may have grounds for negotiation.
When it comes to wanting to pay early, Stapleton says the most important aspect is the underlying psychology to the practice.
Stapleton points out that businesses eager to pay early are often afraid of running out of cash, or hitting trouble they can’t anticipate. While each may be a genuine concern, he says businesses need to create a system that enables cash to freely flow through the business – this means being stringent on debtors and stock.
“You don’t want to hold more stock than you need, so you need to have ways of knowing who owes you what money, when it’s paid, and making sure you have a process when you can expect to be paid,” he says.
“You also need to have another process where you know what stock is moving, and what isn’t moving – and know that so you’re not just buying stuff and adding to your stock.”
“The number of businesses I see where stock is the problem … it’s generally because they didn’t have a feel for what was moving or what wasn’t.”
Stapleton says businesses need to be diligent about picking up the phone and contacting clients weeks or days before an invoice is due.
“I know clients who feel if they do that, they send a message they’re in financial distress,” he says. It’s actually the opposite, Stapleton argues – clients will believe you’re on top of your finances.
“You can also ring as part of your catch-up calls to see how they are, how business is, to keep in constant contact.”
By keeping stock under control, and by managing debtors, Stapleton says businesses won’t need to pay bills early. With agreeable payment terms in place, he says, businesses won’t need to pay any day other than the day payments are due.
“It’s better to set up an arrangement where you just pay when the agreement says it’s due.”
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