Cash flow v supplier credit limits
In a recent article we explained how granting lengthy credit limits to customers was as good as letting them keep your money in their bank account.
In this post we describe the opposite situation, where you are granted longer terms to pay bills from your suppliers.
If you take delivery of goods and services and are granted – say 60 days before you are required to pay for those purchases – then you have the use of the purchases for almost two months before your bank account balances are reduced.
If you can process and resell goods purchased, within the 60 days, and be paid by your customers at point of sale, then your purchase will be fully-funded – from a cash flow point of view – before you are required to pay your supplier.
Obviously, many businesses are unable to sell on a COD basis (like retailers) but taking advantage of generous payment terms from your suppliers can have a positive impact for all concerns from a cash flow perspective.
Effectively, you suppliers are providing you with valuable working capital.
To make the most of this cash flow boost, reduce (when you can) the payment terms you offer your customers and take advantage of any extended payment terms on offer from suppliers.
But beware, if customers want discounts for shortening credit terms or if you lose supplier discounts for longer payment terms, then you will have to crunch the numbers to see how changing credit terms will affect your profitability as well as easing cash flow.