Cold Hard Truth on Small Businesses and Money: How to Pay Others

If you run a small business, you probably spend a lot of time paying other people. I much prefer to write about earning money than losing it – but I’ll make an exception in order to give you some necessary advice about how to manage your cash flow. 

Cash Flow Management

I’ve met a lot of small business owners who take pride in the fact that they pay their bills as quickly as possible. They expect their customers to do this, so why should they hold themselves to a different standard? This spirit is admirable, but it ignores an important, fundamental truth: Business is war! In business school, you’re taught about the time value of money. The same amount of money is worth more today than at any time in the future… so by giving up money now, you’re giving up a more valuable asset than if you give up the same amount anytime in the future.

Now, I’m not suggesting you become a deadbeat and let your credit rating sink into the abyss. But I am saying that you need to avoid some of the big cash flow mistakes that curse small business owners. Here are a few:

1. Generally, do not pay creditors before the date a payment is due. You never know what use you might have for those funds.
2. There is one exception to rule #1: If a vendor offers you an early payment discount, don’t reject the offer immediately. Remember the time value of money. Dig into the offer and be sure that you come out ahead.
3. When picking vendors, do not automatically pick the cheapest option. Some vendors compensate for higher prices with more payment term flexibility. You may never think you’ll be tight for cash. I don’t want you to think this because if you’re wrong, you won’t have a contingency plan.

Building a Contingency Plan

No small business owner with a cash flow problem expected to have a cash flow problem; failing to plan for the future is all too common. But do not fear – there are things you can do to avoid and eliminate this problem:

1. When things are going really well – when you’ve reached a new sales or profitability record – go to a bank to negotiate a line of credit. You’ll have a ton of leverage. Too many business owners go to the bank when they smell trouble. Bankers are trained to be risk-averse, so if you know something’s rotten in the state of Denmark, so will they. And they don’t have an incentive to bail you out.
2. If you’re in trouble, admit it to yourself, and others. This can be very hard because we all like to project an image of strength and success. Have honest conversations with your customers. Don’t tell them everything, but tell them that the situation isn’t great and ask if they could prepone payment. You may wish to offer a discount (though you shouldn’t begin negotiations by offering this). If you’ve got significant late accounts receivable, pursue the folks who owe you money as if your life depended on it.
3. You can apply a similar approach to your suppliers. They may be able to give you a grace period before your next bill is due. If you’re a major client for a supplier, you’ll have leverage; they won’t want you to starve.
4. If you’ve got significant accounts receivable and don’t have the time, energy or ability to collect, you can find others who will pay you for the privilege. Start by googling the “factoring” industry.

I’m glad you read this because too many businesspeople don’t even know cash flow management is important, let alone how to do it. When investing in an entrepreneur, it’s one of the first things I look for. If you follow the above principles, you’ll be well-positioned to weather the inevitable cash flow storms.

Read more about how to pay others, as well as the pros and cons of the different ways to pay vendors, employees, and customers in my newest E-Book,  Cold Hard Truth on Small Businesses and Money--now available exclusively at IOUFinancial.com.