Your suppliers’ terms are the other half of the cash cycle

A cycle has two ends and most people watch one

The familiar picture of small-business cash is entirely about receipts: who owes what, when it will land, how to make it land sooner. That is half of it. The other half is the schedule on which money leaves — when materials must be paid for, when the subcontractor invoices, when the annual charges fall.

What matters is the distance between the two. A business paid within a week that pays its own suppliers a month later has a cycle working in its favour and can grow on its own cash. A business that pays for everything up front and waits two months to be paid is financing every job out of its own pocket, and the busier it gets the worse that becomes.

Measure the gap on a typical job

Take one ordinary job and lay it out on a timeline: the day you pay for materials, the day the labour is spent, the day you invoice, the day you’re paid. The distance between the first outflow and the final inflow is the period the job has to be funded from somewhere, and that somewhere is your account.

Multiply by the number of jobs running at once and you have the amount of working capital the business actually needs. Very few people have calculated this, and it explains the otherwise puzzling situation of a profitable business that cannot accept a large order because it cannot afford to start it.

Terms from a supplier are asked for, not offered

New customers are usually asked to pay immediately, and most small businesses simply accept that as the permanent state of affairs. It frequently is not. Suppliers extend terms to buyers who order regularly, pay reliably and ask — and asking after six months of prompt payment is a much stronger position than asking at the outset.

It is worth understanding that a supplier granting terms is making a credit decision about you, and may want information to support it. That is normal. It is also worth knowing that the terms are a real benefit with a real value, which is why they are not handed out to everybody who enquires.

Paying early is a choice with a price

Some suppliers offer a reduction for early settlement, and it’s worth working out what that is actually worth across a year rather than treating it as a small bonus. A modest percentage taken repeatedly can be a meaningful sum, and it may or may not beat the value of holding the cash for the extra weeks.

Where no discount is on offer, paying earlier than required buys goodwill and nothing else. Goodwill is not worthless — it is what gets an urgent order accommodated — but it should be spent deliberately rather than by reflex, particularly by a business whose own customers are in no hurry.

How you buy changes the cycle as much as when you pay

Buying in bulk lowers the unit price and converts cash into stock, which is exactly the wrong trade for a business that’s short of the former. Ordering in smaller quantities more often costs more per item and keeps money available, and in a tight period that is frequently the better deal even though it looks like the worse one.

The same logic applies to timing. Materials bought weeks before they are needed are money sitting still, and a habit of ordering only when a job is confirmed removes a surprising amount of pressure. The exception is anything with a long lead time, where the cost of not having it is larger than the cost of holding it.

Being a reliable payer is worth money

It is tempting, when short, to stretch suppliers quietly and hope nobody minds. It works for a while and it is expensive, because the businesses you buy from talk to each other, terms get withdrawn, and the accommodation you badly need in a difficult month goes to somebody else.

If a payment is going to be late, saying so beforehand costs nothing and preserves almost all of the relationship. Suppliers are generally far more tolerant of a warned delay than of silence, for the same reason you are: it lets them plan, and it suggests they are dealing with somebody who knows what is going on.