30 May Why You Should Never, Ever Pay Early (With 1 Exception)
Much has been written about the struggles business owners face to get paid on time, and how to get clients who are dragging their feet to pay up. Clients stalling on payments, combined with unexpected expenses, can put your business in a cash flow crunch.
As the owner of a small business, you probably have experienced watching the mailbox each day for a payment that’s overdue, even as you pay your own bills and invoices upon receipt. If so, what I’m about to tell you may seem stingy, scrimpy, or downright tight:
Never pay early.
You won’t always have control over when you get paid, but you do have some leeway when it comes to when you pay your own bills.
Apart from the fact that you are a nice person and may feel a need to make people happy, why would you pay early? What benefits are being derived?
The harsh reality is that unless there is a clear, compelling reason for making early payments to anyone (cash discounts, pricing discounts, special delivery arrangements), DO NOT do it. Hold on to your cash as long as you possible can by closely managing accounts payable.
Hold on to your cash.
Take as long as you possibly can to pay your company’s bills without incurring late fees or impacting your ability to operate. Having said that, carefully manage your communications and relationships with your vendors.
Normally, your vendors will have terms established for the payment of their invoices presented for the delivery of their respective products or services. In order to maximize cash flow, you should attempt to extend the payment a minimum of a week or two beyond those established terms.
In most cases it should be possible to delay payments due within 30 days to 45 or even 60 days before any difficulty would develop with the vendor. Manage the account relationship by managing the expectation for the timing of your payments. Communication is the key.
The ONE Exception
Certainly, if sufficient cash is available to meet the other obligations of your company, you should take full advantage of any and all cash discount opportunities. The relative returns from cash discounts are usually quite significant and are well worth the extra effort required to manage shorter payment timeframes.
- For example, assume a vendor offers a 2% cash discount for payments received within 10 days as opposed to the normal 30-day terms, and your company’s standard payment cycle would dictate that payment be made in 40 to 45 days. By making the payment within the discount terms you are losing the use of the funds at least 30 days sooner than would otherwise be the case. However, your company realizes a 2% return for the use of those funds over the one-month period, the equivalent of a 24% annual return (2% x 12 months).
There are very few investment opportunities that offer such attractive returns with the certainty of a cash discount. This is obviously one of the clear and compelling reasons for paying early.