By Alissa Bryden, CPA, CA
In September, I was part of a twitter chat that discussed cash flow for start-ups (StartupCanada Chats). There was a lot of great advice given by the panel of experts. My twitter name is @vhaccounting and I have been involved in a few of these. The next one is coming up on Friday November 11th at 9am PST.
There was a lot of discussion around delaying payments to suppliers while trying to collect accounts receivables asap. This cash flow technique is not new, if you get the money from your customers upfront but don’t pay your suppliers for 30 days (or whatever the terms may be) you essentially have an “interest free” loan from your suppliers. This can be a great tool for start-ups to plan for cash shortages. However, I wanted to write a blog on it as I don’t see it as an ongoing cash solution.
Delaying payments to suppliers gets you a reputation. This can be magnified in a rural area. When you get the reputation as a slow payer it can have consequences on your business. Suppliers can become unsure of how stable your business is, they may alter how they treat you / prioritize your deliveries or hold them entirely. I have heard advisors and owners comment that they think it is fine if it is in the terms of the agreement. This may be true but if the terms are 60 days and you always wait for the 60-day mark, you may get “bumped” for someone who pays promptly. This also may not be limited to the one supplier. People talk and the business world can be a lot smaller than you think.
Managing cash flow and ensuring you’re a covered in times of shortfall can be the difference between success and failure. However, be aware that these choices have consequences that you may not foresee. My recommendation is always to plan cash flow. If you know you are going to be falling short, then you can take steps which may include these measures to cover these periods.
However, understand you are dealing with other business owners who may have the same cash flow concerns as you do. As the old saying goes treat others how you want to be treated. That, is just good manners and good for business too.