Supplier relationships and cash flow

For every small business, there will come a time when cash is tight. Maintaining a strong business relationship with suppliers can pay off when you're short on cash.

The payment cycle can be a vicious circle and one late payment can affect the cash flow of a string of firms. As a small business it's not always easy to pay promptly, particularly if you have customers who don't pay on time.

However, your customer may also be inundated with overdue accounts. This is why a good relationship with your suppliers can be invaluable. There may come a time when you need an express delivery or a few extra days to pay and a strong relationship will help you get what you need.

During the March quarter 2013, the average number of days it took businesses to pay their invoices was 55 days, a figure which is more than three weeks above the standard 30-day payment term. Meanwhile, businesses failing to pay their trade credit accounts increased by four percent compared to the prior year. These figures demonstrate how late payments can create a vicious cycle and that cash flow for a significant number of small businesses will remain under pressure this year.

To stop the vicious flow of late payments, Australian firms need to positively impact the cycle. Remember, what goes around comes around so use these tips to influence the payment cycle, help out your suppliers and set a good example for your customers.

1. Pay promptly

Do you pay your bills on the due date or do you just pay when you have the cash? Difficult as it may be at times, paying your bills promptly can have a number of benefits for your business and its relationships. Paying on time can improve your trading relationships and positively influence the payment cycle. In fact, having a valued relationship
with your suppliers could assist in securing better deals such as regular reductions or prompt payment discounts. Just remember these kinds of deals are a privilege, not a right, so value them and don't be disheartened if your reliable nature doesn't always result in savings.

These relationships will be most important when you're short on cash. Consider the affiliation you have with a reliable customer and compare it to a customer that rarely pays on time. If they both approached you to ask for a favour, which would you support? It goes without saying you would consider the request of your good customer over the bad so don't expect anything different from your suppliers.

A solid rapport with your suppliers means they may be more open to negotiate on extended payment terms or to waive late payment or interest charges. If you're having serious problems, it may also provide some extra time to ensure deliveries aren't stopped. Being a reliable customer and regularly paying on time may result in your suppliers affording you a little flexibility when you need it most.

Also remember that late payments can affect your credit report, making it more difficult to access credit. Each time you apply for credit, whether for a bank loan or even a phone plan, your credit report is checked to determine your payment history. With a chequered history you may struggle to access credit or be charged a higher interest rate or other fees. It is a good idea to check your own credit report before you need to apply for credit so you can ensure you
know what information is on it and that it is up to date. You can order your credit report (for free) from
Dun & Bradstreet at

2. Cash flow forecast

To ensure you are capable of consistently paying your invoices on time and keeping your suppliers on-side, you need to plan. If you don't already have one, create a cash flow forecast. Essentially, it is a calculation of your cash in-comings and out-goings which allows you to formulate an estimate of how much money you have to spend. Just be sure to include regular payments to suppliers as well as annual charges like insurance.

While, it might not be an exact science, it will give you a good idea of where your cash flow stands. The longer you have been tracking your cash flow, the more accurate your forecast will be. You know how difficult it is when a customer pays late, so you can truly appreciate your suppliers need for prompt payment. A thorough cash flow forecast, which includes all payments (and their due date), will ensure you won't be caught by surprise when a bill falls due. Regularly paying on time, every time can help create a rapport with your suppliers and positively impact the payment cycle.

3. Communicate with your suppliers

When establishing a trading relationship, it's worthwhile taking some time to discuss payment terms, payment methods and any other preferences. However, if you didn't do that at the outset of your relationship you haven't missed the boat - it's never too late to start. But keep in mind that communicating these preferences at the start of a relationship can save a lot of time and hassle in the long run. The last thing you want to discover is that your payments are not being processed because you're not meeting your supplier's requirements.

On the other hand, it's also worthwhile letting your suppliers know what you require to ensure prompt payment. For example, if your payment processes don't allow for seven day payment terms or if you require purchase order numbers then discuss the situation and see if you can reach a compromise.

Just remember to be flexible - there is nothing worse than trying to deal with someone who is not open to alternatives.
Doing right by your suppliers now will mean they will be more likely to reciprocate if or when you need it. Make sure you let your suppliers know early if you believe something is going to prevent you making payment by the due date - they may be willing to adjust the payment deadline or allow you to make incremental payments. Take the initiative and
communicate early; be honest, explain the situation and your intention to pay the full amount.

4. Be fair

Treat your suppliers fairly. Be aware that the level of respect you show your suppliers will influence the way they regard you. It is in your best interests to make it easy for your suppliers, and they should treat you fairly in return.

Also, always behave in a friendly and affable manner when dealing with your suppliers. If they help you out by approving that express order or extended payment terms, then say thank you and let them know it's appreciated. A little respect goes a long way to securing and maintaining a solid business relationship.

The central theme is simple - always be mindful of the impact your actions have on other businesses. You know that you can't control your customer's actions, but you can make a positive impact on the payment cycle by treating your suppliers fairly.


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