I believe that as a company we take a different outlook on things compared to traditional business philosophies.
It’s a difficult thing to describe because it’s more about culture or ethos than systems or practices. However, every now and again, I see a nice example of this, and wanted to share one with you today.
As the director of a small business, the responsibility of paying supplier invoices falls on me. In actual fact, quite a lot of things fall on my lap, and invoicing is just one of those, however, this post is not about my job!
Lots of business gurus, accountants, financial advisers, and almost anyone you ask, will tell you that you should pay invoices as late as possible. This is fairly common practice in industry, and there is some logic to it.
Why Pay Late?
If you buy £50,000 worth of products from Company X but tell them you’ll pay them in 4 weeks time, you’ve got 4 weeks to try and sell as many of those products as possible. If you sell half of them for £50,000 then you can pay your supplier, and you’ve still got a lot of products to sell! Essentially, the goods from the supplier are provided like a form of credit. They’re ‘lending’ you the money to buy the goods, and giving you 4 weeks to pay them back.
The business term for that is easing your cash flow. If you can have the cash flowing in (sales) before it flows out (paying suppliers), then it’s a lot easier to manage.
There are also some other related benefits, you might earn interest on the money while it’s sitting in your bank before you pay your supplier or you might be able to negotiate a better price if you buy more at once. There are a lot of good reasons why working this way is worthwhile.
Is That Normal?
Yes! As a rule of thumb, the bigger the business, the longer they take to pay their suppliers.
If you make a product, and Walmart comes along and decides to trial it in their stores, they could become your single biggest customer in an instant. When they know your business depends on them, they don’t negotiate terms, they dictate them. If you want to do business with them, then you do it the way they want to do it (disclaimer… Walmart is just an example of a big business, I don’t know if they actually work like that!).
Why Don’t We Do That?
I’ve never been comfortable borrowing anything, let alone borrowing money for business. That probably means I’ve missed opportunities that could have been lucrative, but it also means that our business has been built on its own back – we’ve never borrowed money and taken on the risk associated with that (I did invest £10 at the beginning, but got it back the next day).
In the first few years of the business, we paid for everything up front. So we bought 1 product, sold it for a profit, used the profit to buy 2 more products, sold them, used that profit to buy 5 more… etc.
Suppliers are Our Partners
When we opened our first credit account, it didn’t seem right to take the product without paying for it. Sure, I understood the benefits, but it didn’t seem fair to the supplier. That has stuck with me over the years. I see our suppliers not as banks, not to be taken advantage of, but as partners. If I look at them as partners, then it makes sense to want to treat them well.
As I already alluded to, the list of things for me to do is not small. I could be forgiven for forgetting about settling our supplier accounts. However, roughly once a fortnight, I spend some time paying virtually all of our outstanding invoices.
Today, I did a simple calculation of the number of days between the invoice date and our payment date across all the invoices we’ve received in 2011 so far. Someone commented to me that the average time to pay an invoice in our industry is around 45 days. Our average today was just 17.32 days. I was amazed when I read that figure. I knew I took this seriously, but I have never quantified it before.
I’m constantly looking for ways to measure the performance of various aspects of our business, and I’m going to use this figure over the coming months and years. I think it’s a nice indication of how we feel about our suppliers, and how we believe that we don’t just buy from them, we work with them. What’s good for them, is good for us.
Can You Make It Even Lower?
Yes, I think we can.
Although, it’s important to note that this is the difference between the date of the invoice, and the date of payment. We don’t always receive invoices on the date they’re issued, which means it’s impossible to bring this down to zero in some cases.
For example, some suppliers print out paper invoices, pop them in an envelope, miss that day’s post, then they arrive at us 2-3 days later (or after a weekend later), then we need to open the mail, process the invoice and then make payment. Improving how long each step takes is definitely possible, and we’ll certainly aim for a 0 day payment terms, but it may take us a while to get there!