> Is the author suggesting screwing over the companies you buy services from by not paying them?
Some companies play this game all the time - I’ve even heard it referred to as “supplier stretch”.
They pay eventually, but late to improve cash flow. The flip side is when they come to renegotiate their contract, you take late payment into account in the new offer, and they have hurt the relationship, so it’s not a particularly long term strategy (and once you have started, it can be hard to pull back to a position where you aren’t late for everything depending on cash flow).
You also don't get to dictate the suppliers response to stretching them. If you keep stretching me, one day I'm going to be fed up and not send a shipment until you've paid. If you're truly running it tight like many are, you may have been relying on selling that stock to pay for it, shoot that's a bad spot to be in.
As I've said in other comments though, keep people in the loop and you'll have a much better time. Communicate first and make decisions based on the outcomes of that. Maybe the outcomes the same, and you don't get sent the goods, that's fine at least you know ahead of time and can react.
What I've done to avoid being put in this situation is put in intentionally punitive late payment terms (16% + base rate AER calculated monthly), and then hold customers to it if they start to play this game. This is double the statutory rate and if they're being really arsie I start adding on "reasonable cost" charges every time I have to chase an invoice. This works because every month (or even more freqently) they get a credit note for the old invoice and a new invoice with the interest and chasing fee added. This costs money not just in the added interest etc., but also in time. The way I figure it, the payment terms on my invoices are 30 days. The "real" payment terms (before I start doing the above) are 60 days. If you haven't paid by then, you're either incompetent, insolvent, or in danger of becoming so.
> They pay eventually, but late to improve cash flow.
I‘ve never understood this. If you stretch creditors out to say 120 days, then you only gain the difference in value between the amount owed today vs the same amount in 4 months, which is next to nothing. Once you’ve stretched a creditor to their limit, your payments occur at the same frequency as they would if you didn’t stretch them. So it provides a very marginal one-time benefit, at the cost of pissing off companies you need.
I mean, stretching creditors will make your bank balance look fatter, but it doesn’t mean anything because the trade creditor liabilities will remain on your balance sheet, and it’s your balance sheet that counts. Of course, it might be desirable to have cash in the bank if you’re sailing close to the wind, but you’ll be sailing close to the wind when those debts become past due, too.
Cash flow is differwnt from overall profit and loss. Stretchibg payment terms doesn't help you with the latter, it certainly does with the former. Assume you get your money from clients faster than you pay your suppliers, something quite common in retail.
One can be profitable and cash positive (best place to be in), cash positive and unprofitable (acceptable, especially for growth-focused businesses), cash negative and profitable (kind of ok-ish assuming some reliable backing by banks to cover any cash constraints) or cash negative and unprofitable (the by default dead category, excluding VC money I have the feelong a lot start and scale ups fall in this category at the moment).
It’s about cash flow - plenty of fundamentally profitable companies go bust because of short-term cash flow issues, so if you can give yourself an extra two months leeway from a financial perspective that can be huge for survival.
Another simple way to look at it: If I am buying 10,000 widgets for £80 each and expect to sell them for £100 across the next three months, I either need to have £80,000 sitting in the bank that I then tie-up in phones, or I agree to pay £80,000 in three months (maybe it is then £85,000 due to credit terms) but then I can sell the phones before I buy them.
It’s a minor example, but if you imagine you are a growing retailer and employ this strategy you can grow much faster than another retailer who doesn’t (and has to tie their cash up in stock).
Above examples are very simplistic because it’s about stock, but same logic can be applied to other purchases - most cash spend a business makes should presumably deliver some sort of value, so paying later allows some of the value to be realised before payment is required.
Yep this makes sense, thanks. My background is SaaS services where you have long term contracts payable monthly. I don’t think there is a clear cash flow benefit in that case, for the reasons I gave. But I totally get it for your example. It’s a kind of leverage, right? Effectively using your suppliers as a loan facility.
Some companies do it intentionally. Some do it out of sheer incompetence in the procurement and accounts payable departments / processes. Personally, I almost prefer the first option, it is somewhat easier to recover from.
Some companies play this game all the time - I’ve even heard it referred to as “supplier stretch”.
They pay eventually, but late to improve cash flow. The flip side is when they come to renegotiate their contract, you take late payment into account in the new offer, and they have hurt the relationship, so it’s not a particularly long term strategy (and once you have started, it can be hard to pull back to a position where you aren’t late for everything depending on cash flow).