Every entrepreneur knows that cash is king. It is also ace, queen, jack and 10.
You must have cash to do business — whether for expenses such as rent and utilities or for inventory or carrying accounts receivable. Ideally, your company has been properly capitalized and has established a solid banking relationship for debt needs. I say ideally because in this market environment, equity capital, when available, is very expensive, and bank financing has become more challenging — even for established companies with established banking relationships.
By only budgeting “need to have” expenses and then practicing budget discipline, you can help control the expenditure side of cash management. Prompt invoicing and close monitoring of your accounts receivable are at least as important in cash management on the revenue side as care is on the expenditure side.
Paying your bills on time can also be of huge benefit to your start-up or aggressively growing company. Even if cash is scarce, pay your bills on time, don’t take unearned prompt pay discounts and don’t dispute charges that are valid. If terms are 30 days, always pay on the 30th day. If you are offered a 2 percent/10 day prompt pay discount and have the ability and desire to take it, pay on the 10th day.
If your company has both prompt and slow pay customers, you know how differently you think of them. The prompt pay customer is almost always a pleasure to do business with, and the slow pay is a pain. The slow ones always have an excuse for late or partial payments, and it happens again and again.
Often, the aggravation and the cost of doing business with a poor pay account make them not worth doing business with. Your vendors have the same perspective when viewing your payment history.
A great benefit of paying invoices to terms is the enormous goodwill you build with vendors. If you are a small or young company, a supplier has taken some risk in extending you credit. Paying in a timely manner makes that risk virtually disappear, and you become a highly valued customer.
Your history of prompt pay is an enormous asset that you will have built by simply doing what is expected of you. Prompt pay is a rare opportunity to easily create a valuable asset, and will serve your company well in many ways. Erwin Bruder ([email protected]) is chief economist & managing director of emerging enterprises at Prim Capital Corp. Reach him at (216) 830-1111, ext. 2220.
