If you can’t pay all your vendors right now, it helps to start with the basics. Cash flow management is about controlling the money coming into your business and the money going out of it. Collecting on receivables or moving to shorter payment terms will increase the amount of money coming in. Delaying payments to vendors slows down the amount of money going out of your business. This gives you the float you need to keep up with operating expenses during difficult times.
Jeff Dunn, writing about reopening a business, suggests dividing vendors into three categories. There are the critical suppliers you pay as soon as possible. Then there are the important but not critical vendors that you pay on the slow side. And finally, there are the ones that aren’t really important to your business going forward. For those you pay whenever you have extra money. The hard part is figuring out which vendors go in which category while still maintaining good relationships.
Prioritize the Ones That Are Essential
When you can’t pay all of your vendors, prioritize the ones that are essential to keeping the business running. If your business can’t sell without the product or service they provide, they come first. It won’t help to free up cash if you can’t generate any sales, so paying these vendors is necessary to keep the business alive. If you run out of inventory, you’ll have nothing to sell and therefore no income. So there’s no point in prioritizing the vendor that does general marketing work to the same level as a vendor that provides the essential bread and butter of your business.
With the critical vendors already checked off your list, you’ll want to think carefully about what will happen if you don’t pay each of the other vendors. Will there be a heavy financial penalty? Will the supplier immediately cancel your account? Sometimes vendors allow you to pay at your own pace. But others have strict terms for payment with punitive late fees for noncompliance. If the vendor uses penalties to encourage prompt payment, it makes them a priority for you. The same is true of any vendor that can cancel your contract if you don’t pay.
Also keep in mind the long-term relationship. Some vendors are highly respected in your industry or well connected to other suppliers and lenders. Falling behind with one of them might ruin your reputation, making future financing or any kind of supplier relationship more difficult.
Negotiate Better Payment Terms
If you have vendors who don’t charge you for late payments, hold off on paying them until you have to. Many small business owners don’t know what the payment terms are in their own vendor contracts. Review all your vendor agreements and penalties, then put the vendors into two groups – the slow-to-pay and the later-to-pay. When you can delay a payment without a penalty, it’s basically an interest-free loan, and for a business short on cash that can be a lifesaver. Try to negotiate with your vendors for an extension, longer payment terms, or alternative payment options.
When is the best time to negotiate better payment terms with vendors? Not when you’re desperate, but while you’re financially healthy and have a solid payment history. If you’re the vendor’s largest customer or have plenty of options for the same items, you’re in a good position to ask. Planning ahead when you have strong cash flow helps prepare for any shortfalls caused by a slowdown, disaster or other disruption. On the other hand, when you are in a pinch and asking a vendor for a favor, you have little or no leverage.
If you didn’t negotiate better terms before you got into trouble, it’s not too late. If you ask vendors upfront how you can stay in business together until you’re in a better place, they will likely respect your honesty and be more inclined to work with you on a fair solution.
Keep Talking to Your Suppliers
Keep talking to your suppliers even when you don’t have the money to pay them yet. You need to contact them directly, and you need to pick up the phone or email when they reach out to you. They worry when they can’t communicate with you. They might not want to keep doing business with someone who seems unreliable. They’re also more likely to turn your account over to collections if they can’t get in touch with you. And the last thing you want is for your company to go quiet on its business partners.
The same goes with your bank. If you think there’s a good chance you’re going to break a loan covenant, it’s worth talking to your banker about it before the issue arises. Letting them know your concerns early on means you might have a little more wiggle room if things get tough.
While you’re looking at accounts payable, remember that’s only half of cash flow. Make sure you’re also staying on top of accounts receivable. Shorten the average collection period and get everyone’s accounts up to date. Tighten up your accounts receivable policy so you can adjust terms for anyone who pays late or isn’t likely to pay at all.
You may feel like you have no options, but you still have some choices. Try to pay the vendors that you can’t run your business without and the vendors that will hit you with penalties or cancel their services on you. For the others, it may be possible to slow them down a little. Keeping communication open with your vendors and your bank is essential through all of this.
