In my article “Some Bad Advice on Cash Flow Management” I mentioned that sometimes conventional wisdom isn’t very wise. In this article, I am going to bust the myth that you should always pay bills as slowly as possible and hold onto your cash until the last possible moment.
There are at least seven instances when you may want to spend your cash quickly:
Early Payment Discounts
Some companies will give you the option of either paying in 30 days or paying more quickly, with a discount. The most common discount is 2% if you pay within 10 days, but if you don’t, then the full amount is due in 30 days. This is known as “2/10 net 30.”
Why this a good deal if you have the cash to pay early? It’s like earning 36% interest on your money! The vendor is basically saying “Give me your money 20 days early, and I’ll give you 2% back.” This is the same as if a bank said, “Put your money in my bank and I’ll give you 2% at the end of 20 days.”
In this example, if you gave your money to the bank every 20 days, you could do this about 18 times a year (365 days divided by 20 is about 18 times.) 18 times with 2% back each time, a total of 36% in a year.
36% interest is hard to find anytime, anywhere, so it’s a really good deal to take when you can.
Cash discounts are similar to early pay discounts, except they strictly deal with cash. The companies that offer cash discounts are usually smaller businesses, so the opportunities to save are limited, but when offered, they are often even bigger opportunities to save. Here are a few times that I’ve saved money by paying cash and how much I saved:
Usually the discount is offered after I ask, “Do you give a discount for paying cash?” While most of the time the answer is “no,” when the answer is “yes,” it pays off big. Don’t be afraid to ask.
One last note: Companies have a lot of different motivations to get paid in cash, but I won’t explain those here. Look for a future article on why I absolutely do not recommend that you run your business receiving cash. It can be a real mess on many levels.
Sometimes it pays to buy more than you need, if the discount is big enough. Here is a quick example: I always buy printer paper by the case, even though it will last a year or more. Why? Because I can always find case pricing that is 50% less than buying the 500-sheet packages individually.
This is the same for other office supplies and promotional items that I buy. When I work with manufacturers and retailers, we always look at cost breaks for buying inventory. Sometimes the discounts are huge for buying just a little more than needed, so we change the buying policy for those items.
When you are analyzing volume discounts, look at more than just the price. Sometimes buying a specific volume gives you additional benefits such as free shipping or free add-on products. These additional benefits could be what makes buying bigger volumes worth it.
Annual Payment Discounts
Monthly subscription services are becoming more and more popular for anything from software, to food, to clothing. It’s a safe way to try something without making a long-term commitment.
Many of the companies that offer monthly subscriptions offer significant discounts for paying annually. I changed my Dropbox subscription from monthly to annual just a week before writing this, after paying monthly for at least 5 years. The annual savings was 17%.
If the discount is big enough, I buy it for a year after doing just the free trial, even if I’m not sure. If I can get a 50% discount, then I only need to use it for 6 months to break even so the risk goes down that I’m paying for something I don’t use.
Unless you know that you want the subscription for just a specific amount of time, once you’ve used a subscription service for a few months, you should decide to either cancel it or pay for the annual subscription.
Create Solid Vendor Relationships
Sometimes the motivation for paying early is not purely financial. Having solid relationships with vendors can be a critical competitive advantage in some industries. Good relationships might mean preferential priority when there are product shortages, access to new products earlier, input into product development, invitations to client perks such as sporting events or exclusive meetings, or other rewards that directly or indirectly benefit your business.
Having a positive relationship with a vendor can also be beneficial if you ever need to pay late. Having a good track record of early payments may help maintain a good relationship.
Only some businesses have key vendors that they want to keep happy. Choose those key vendors wisely. Most vendors won’t care, and if they don’t, you should pay on time, but not early.
Hire and Retain Hard to Find Employees
I was shocked to learn that one of my clients is paying their employees and key sub-contractors a month in advance. For example, on July 1 they receive a paycheck for July 1 – 31.
They are a small software company and felt that it gave them an advantage when hiring. I went out and checked with some other people in the software industry and learned that paying in advance was not unusual to acquire and retain good people.
I asked about people quitting at the beginning of the month, right after paychecks went out, and only heard of one incident when this caused a problem. The company this happened to still pays in advance because they generally still keep their hard to find programmers longer, so it’s worth the risk to them.
Manage Your Debt
If you have debt, especially high-interest credit card debt, consider paying down your balances. Yes, you want to have some cash in the bank as reserves, but too much cash in the bank is counterproductive.
Decide how much in reserves is enough and anything in excess should be used to pay down debt.
A Couple of Cautions
Make sure you document your cash purchases with proper receipts and keep them with your records. You’ll need receipts to document
Before you think about paying faster or spending more, make sure that you have your business’s basic needs covered. Basic needs include:
It doesn’t do you any good to try to get a little extra for your business if at the first sign of trouble you don’t have the cash that you need to carry you through.
The other caution when you have “excess” cash is to not start increasing your discretionary spending too quickly. Many business owners start increasing expenses that do not provide benefits to the company, such as meals, travel, and “toys” that aren’t needed to run the business.
Have a budget and stick to it for your operating expenses.
Use your cash wisely.
When do you spend your money quickly?
I’d love to hear any ideas you have that I may have missed regarding when and where you spend your cash faster than conventional wisdom would advise.
Is there a topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’ cash.
David Safeer helps businesses implement cash management systems that create business breakthroughs. He founded The Cash Management Project in November 2018, to help businesses manage and optimize their cash resources. David writes, teaches, and works with diverse companies around the world.