Seems like a simple question. Why would you want to give your money to your vendors faster? Shouldn’t you hold on to your money as long as possible? Well, it depends. Each situation is unique, but here are a few reasons why:
- Avoid late fees
Many vendors will charge a fee if you pay your invoices late. These can be 2% or more per month. If you are several months late, this can really add up. 2% of a $100,000 invoice is $2,000. Extend that to 2 months and you are looking at $4,000.
- Get discounts for paying early
Opposite the late fees, you could receive a discount for paying early. Typical discounts are around 2%. Paying that same $100,000 invoice 15 days early instead of 15 days late could mean a difference of $4,000. Companies literally waste hundreds of thousands and even millions of dollars by not managing payments.
- Have a more accurate picture of cashflow
If you do not know what payments are going out or if they are late, it is very difficult to understand what your cashflow looks like. It may appear like you are in a better position than you really are.
- Keep your vendors happy
Most vendors appreciate being paid on time or early. Late on the other hand, tends to make them nervous. Depending on your industry, paying late may cause you to lose access to vendors who trust you. When speaking to prospects in construction, they had reached the point where they could not bid on new projects because no one would work with them due to very late payments.
A good reputation is hard to build but very easy to tear down. It can take just one vendor or subcontractor to ruin your reputation. Word spreads quickly that you are not reliable and do not pay your bills on time. Companies that pay on time also appear more financially sound than those that do not.
Each situation is different, but companies should strive to pay on time. If your current cashflow does not allow for it, communicate with your vendors to let them know. When you leave them guessing, they will assume the worst. You really do not want to lose their trust.