You're struggling with cash flow constraints. How do you decide which suppliers to pay first?

Please, do not prioritise! First tslk to people and agree on schedule. Most will agree. People hate to be prioritised. People love to be respected and treated with honour.

First, pay your smallest suppliers first, then your most important inventory suppliers. Then go to the accounts receivable listing and work your customers for payment, you would be surprised what happens.

Review contract terms to identify penalties, interest charges, or potential legal repercussions for late payments. German Mittelstand firms often have long-standing relationships with suppliers; honoring contractual terms helps sustain these partnerships.

Do not look only the letter of the contracts. To understand the risk related to a breach of contract you need to understand the context of the contract. Is the contract a non-updated model from five years ago? It is likely that the supplier is not focusing on enforcing the contract. You know that the supplier has a well defined system and process to react in case of default? Then the risk related to the breach increases. In short, there are a lot of companies who are lazy regarding their collections. In case of need, you may have to pay less attention to the bills of those companies.

Take a close look at each of your supplier contracts, and get a clear picture of the consequences for default on each. You need to understand your obligations and exactly what the penalties are for late payments. This will identify which payments you absolutely can't miss, and keep you out of legal hot water.

Assess the impact of delayed payments on each supplier. Prioritize paying smaller, critical suppliers who might be more vulnerable to cash flow disruptions. Mittelstand companies often rely on a network of specialized, smaller suppliers, making their financial health crucial to the overall supply chain.

Once you've taken care of your mission-critical vendors, go through the rest of your suppliers one by one. Ask yourself how relevant each one is to your business's success. Are they easily replaceable? If so, at what cost? This way, you can figure out which suppliers you need to keep and which ones you can negotiate with, and where the line would need to be drawn when you do.

Take advantage of early payment discounts offered by suppliers when feasible. This not only improves cash flow but also reinforces positive supplier relationships, which are highly valued in the Mittelstand sector.

Look for opportunities to take advantage of early payment discounts. Saving money is always great, but make sure it doesn't strain your finances too much. If paying early puts too much pressure on your cash flow, it might be better to maintain liquidity, even if you have to pass on some discounts.

Maintain transparent communication with your suppliers about your payment plans and any anticipated delays. German Mittelstand companies are known for their strong, trust-based relationships, and open dialogue can help preserve this trust.

Be upfront with your suppliers about your financial situation. Brutal honesty goes a long way, and most vendors appreciate it. They might be willing to offer flexible payment terms; they're almost always more understanding and flexible than you think they will be. Getting transparent and working together with them to get through this builds strong relationships. You end up with contacts that feel like friends, partners and team members in your supply chain.

Develop a strategic payment plan to manage cash flow more effectively. By forecasting and preparing for future financial needs, Mittelstand firms can mitigate risks and maintain supplier confidence even during cash flow constraints.

Feeling like you’re about to let someone down is an awful feeling. Feeling like you can’t afford to pay your self is even worse. The best way to avoid getting into this situation in advance is to read Profit First and implement it. Even if it feels like overkill because your business is still super small - it’s worth it. The financial peace of mind it brought me to we priceless and even helped me to come through COVID with an uptick in profit. Plus the author is hilarious which helps!

Now that you've avoided the reefs but the storm's not over, it's time to plan your way slowly but surely out of this ever happening to you again. Make sure you have a solid financial plan in place by creating a detailed overview of your income and expenses. Revisit it monthly, and adjust both sides to stay prepared for potential financial challenges. Having a clear plan can make a huge difference, allowing you to be proactive instead of reactive with your cash flow situation.

In the supplier diversity community, the answer to deciding which suppliers to pay first during tight cash flow times is straightforward: we pay the small business owners first. Small business owners are the backbone of the country's economy (in Canada they represent 98% of businesses), they employ local people (often from diverse and disadvantaged backgrounds), the support their community (in local sponsorships, in-kind contributions, leadership). Explain your situation and negotiate temporary flexible payment terms with your largest suppliers. From what I have seen, large suppliers, especially those with robust supplier diversity practices will understand exactly why it is critical to pay small businesses first.