Paying suppliers faster can actually increase profitability and strengthen your supplier partnerships. Most accountants will tell you to slow your payments to suppliers, thus building accounts payable and allowing your suppliers to finance your inventory. It’s a basic cash flow principle. But this practice has several downsides.
First, your suppliers will figure out how to charge you interest on your debt to them, especially if it’s more than 30 days old. They may not charge direct interest, but you better believe it’s buried in the price somewhere.
Some companies really stretch out their supplier payments. One large company pays in over 100 days. For their small suppliers, this creates a terrible cash crunch and can even threaten their existence. Remember, most banks won’t lend on accounts receivable that is over 90 days old.
Take Advantage of Discounts
Second, using very short payment terms is a strong lever in negotiating early pay discounts. I know a company that got a large cash infusion and took advantage of the one time opportunity by offering to make their payments (which were usually around 45 to 60 days) within 10 days if the suppliers offered an early pay discount. Most did, and the discounts ranged from 2% to 3% and more. For middle market companies, this can represent hundreds of thousands of dollars in added profitability.
You can finance this by reducing your inventory and collecting your receivables on time; you don’t need to go to the bank or investors the find the money. Those two actions also produce even more profit, and soon the value of your company begins to really move up.
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