Chapter 7 -
Timing disbursements

Speeding up collections is one way to increase cash flow; another is to hold on to your money as long as possible while keeping a good credit rating. A good payables system helps you monitor due dates and press the limits without damaging your reputation.

As an owner or manager, are you constantly thinking of ways to hold on to your money longer? This chapter outlines several commonly used methods for stretching out the grace period – the time before a payment becomes past due – on each bill.
What is the impact of managing your disbursements? For every $1 million in annual expenses, you spend about $2,700 each day. Gaining just 10 days more time to pay your bills can add $27,000 to your cash balances.

Beyond stretching the grace period, there are other factors to consider before we present the different techniques – your personal preference and your current situation.

The ‘on time’ mindset
Like most people, you probably grew up believing that paying bills on time was important. We aren’t advocating being delinquent with your bills. Most successful business owners are somewhat thrifty and dislike owing money. More practically, a good name and credit rating are extremely important, and you will always benefit from a good reputation.

With the general preference for paying on time acknowledged, consider how to effectively manage your system for paying bills. First, you must adopt a mindset that you can hold bills for as long as your supplier or creditor will allow you to. You don’t have to pay a bill when you open it. For many people that can be tough, because not having a liability makes them feel good. You must remind yourself that having an unpaid bill is OK.

Your situation
How you pay bills should depend to a large degree on your current situation. As outlined in Chapter 2, assess your cash position. If you are in a good or excellent cash flow situation, you may choose different options for cash disbursements than if you are in a poor situation. Either way, we will clearly outline the general guidelines and point out where differences in cash position might change your approach. The short answer to most questions in this chapter, therefore, is, “It depends.”

Systematize
The most important step toward holding your money longer is to establish a system for timing accounts payable. In Chapter 11, we will discuss a formal cash- reporting system. Your cash disbursements will be part of that system, along with your collections. Knowing the details of those reports will help you determine when to schedule disbursements. But first, we have to create those reports, and it starts here with understanding when to pay.

Should I pay early to receive a discount?
Usually, but it depends. Suppliers often give you the option to deduct, for example, 2 percent if you pay within a certain time limit. As we discussed in Chapter 6, this is the equivalent of investing funds and getting a guaranteed 36 percent return. It sounds like a great option. Why wouldn’t you take advantage of any discount?

If you are in a cash-rich situation, you certainly want to take the discount. If your lines of credit are tapped out and you’re fighting for survival, you will want to keep your money as long as possible.

Suppose you are offered invoice terms of 10/2, net 30, meaning that if you pay within 10 days, you can subtract 2 percent from the invoice. Otherwise the entire invoice amount is due in 30 days. This equates to an equivalent annual interest rate of 36 percent. On an invoice of $10,000 you would save $200 and remit $9,800 to your supplier.

If you had to borrow money to pay early, your cost would be $81 (0.83 percent per month x $9,800), assuming a 10 percent annual interest rate. For the year, your gross savings would be $2,400 and your borrowing cost would be $976, producing a net savings of $1,424, or $119 a month. If you could take such a discount on $100,000 per month, that’s serious savings.

Now for the catch: To take advantage of discounts, you must be a great cash manager and run a profitable operation. In addition, you must have access to an interest rate of 10 percent, assuming that your line of credit isn’t already maxed out.
If you are not in at least an average cash position, discounts don’t pay off from a cash flow perspective. If you are in a cash-rich position, by all means take advantage of the discount; just be careful and know what you are doing. To know what you are doing, you need a cash reporting system.

Without a discount, don’t pay early
It may seem obvious, but if there is no discount, don’t pay early. Hold all bills until the last possible minute. To do this, you must learn how each supplier works and what your limits are with each. There is nothing wrong with actually writing the check and sealing the envelope. Just don’t mail it until it’s time.

Negotiate good terms
Negotiate all new credit opportunities from the beginning, but remember the limits. Most suppliers offer two prices – good ones for good, fast-paying customers, and higher ones for people with lousy payment histories or a tendency to harp and negotiate. Shop around for suppliers and compare prices and payment terms. You might be willing to pay a few more dollars to change from net 30 to net 45. Your money can make a lot more money for you in 15 days.

You also can negotiate financing terms. Don’t spread the terms of the loan past the useful life of the asset. If the asset is a new truck, for example, spread the terms no longer than five years. Conversely, don’t pay too fast. If you take great care of your rigs, spread the cost over five years instead of four. Although you may ultimately pay more in interest, you may be able to grow your business with the excess cash. And if your business is in good cash and profit shape, you can pay the loan off early if you negotiated that in the terms.

The bottom line is to never take whatever is given. Move around terms to better suit your needs. Often, you can create a win-win situation with your creditor or supplier.

Incorporate delay tactics
In your everyday accounts payable system, incorporate delay tactics to slow the disbursement process. An example may be to accept invoices only at a P.O. box. If suppliers or creditors bill you at another location, you can return the bills until they get it right. Better yet, the post office will probably return them for you. To take advantage of such a tactic, you have to state your policy clearly. You are not being devious. You just stated your requirements for doing business. Remember, you are the customer in the accounts payable arena. Define your terms.

You also might want to tell creditors and suppliers that your company cuts checks only on certain days of the week. If the due date is close, this may legitimately buy you a day or two.

Whatever your tactic, it’s important to know and monitor your company’s credit bureau scores. Get a report on your own company from time to time to see what your suppliers are saying about you. Your banker could be one of the first to get a call from suppliers if you abuse delaying tactics.

Biweekly paychecks
Paying employees every two weeks rather than weekly improves cash flow because you keep your money longer. Consider switching to a biweekly arrangement, even if you need to give employees a small one-time advance to help with the transition. In addition to holding money longer, biweekly paychecks reduce the amount of work needed to produce payroll and cut in half the number of checks you issue each year.

You must take into account, of course, your competitive situation. If drivers in your market are accustomed to weekly paychecks and settlements, moving to a biweekly schedule could present a recruitment and retention problem. Quietly survey your emplyees to judge the impact.

Mail payments on Fridays
Mailing your payments on Thursday or Friday will optimize float, which we will discuss in Chapter 14. You can also optimize float by mailing your payment at the end of the day.

Another way to time disbursements more precisely is to pay through bank draft. You can set up a certain draft day – ideally the last possible day – with suppliers, creditors or utility providers. Since the other company will receive its funds on that day, you are maximizing your terms without being late.

Another way to stretch the grace period is to use a credit card whenever possible. Paying by credit card will extend your grace period by 30 days. Your supplier or creditor will receive its money on time, and you will have another 30 days to hold on to your money. The credit card company is floating you during this period – assuming, of course, that you pay off your entire balance each month.

In Summary
Holding on to your money longer is a great cash management tool, provided that you balance timing with getting the best price and other terms. It’s crucial, however, not to extend grace periods to the point of affecting your credit rating. Your good name and reputation are
paramount.