"The creditor hath a better memory than the debtor." - James Howell

3 Reasons To Avoid Payment Stretching

Have you ever been a situation of unfulfilled promise? You hold up your side of an agreement, but the other side does not? This can be root of some of the most epic disagreements of our time, and it happens in the business world more often than you'd expect. More specifically the payment process. A service is rendered but payment has not been received yet.

Sometimes companies choose to stretch their payments by paying invoices past their due date. And sometimes these payment stretching practices are for good reason. 

Causes For Payment Stretching

There can be a few motivating factors for payment stretching.   

Cash Flow

The company simply wants to improve cash flow. The margins are thin. There is a desire to gain a little bit of cushion before a payment is made. So, the decision is made to delay the payment past the due date. It's a calculated risk - the hope that a late fee will not be incurred based on good faith and proven payment history. Even if a late charge is incurred, it may be worth it. It will increase cash flow and improve the appearance of the balance sheet. 

Appearance 

When businesses are struggling, sometimes it's important that the business appears to be running fine. It is important to show this to vendors, customers, employees, stakeholders, etc.

What happens when the company is forced to stretch their payments past the invoice due date is not a matter of choice but rather necessity? 

THE DANGER

DAMAGES VENDOR RELATIONSHIPS

So, let's start with probably the most obvious reason for why delayed payments can hurt your business. Payment stretching techniques can be damaging to your vendor relations. You need your vendors, so your business runs smoothly. Issues in the operations of their business have the possibility to affect your business. The delayed payments of their customers can impact the company's cash flow and their ability to operate. 

Careful management of buyer/supplier relationships is important, and payment stretching can be a huge step back. It can foster bad blood and distrust on both sides. When this happens, operational performance suffers.

To discourage late payments, suppliers/vendors will often offer substantial discounts to customers that pay ahead of their due date to avoid cash flow issues. The suppliers want their cash conversion cycle to be as brief as possible, so that they can get their money back to produce more products for their customers.

When payments are stretched out, the flow is disrupted. 

THE PROCESS BECOMES COMPLICATED 

Plain and simple. It creates more work for your accounting department. Payment stretching forces them to track more than they probably should. You have to also remain cognizant of the human error factor. This process opens up more opportunity for mistakes. Not to mention it's a source of waste in the operations of your accounting department. 

Let's be honest. The main concern of vendors is tracking and hunting down clients who haven't paid. It's not to keep an eye out for clients who have overpaid. The intent will probably not be malicious if you overpay, and you aren't notified. It will have just been overlooked.  

It's a form of waste that creates inefficiency within your business operations. Remember, in our industry, lean is king. Your entire operation needs to be lean. It's not just an "operations philosophy." 

INTERNAL ISSUES 

More work is created for the accounting staff. The accounting staff's role is complicated enough. They often have to manage a very complicated process. This philosophy will increase their work load due to duplicate payment preventions processes and an increase in call volume from vendors.

Don't put your staff in a situation like this unnecessarily. This pressure and complexity can cause mistakes or tasks left undone. Other areas of your business will be in jeopardy of not receiving the necessary level of attention. 

To read the article that inspired this post, check out Brad Schaefer's post. He offers some good tips on how to minmize the negative impact of payment streching if there is no way around for a company.