3 THINGS YOU MUST DO BEFORE APPLYING FOR BUSINESS FINANCE Funding and Business Growth Playbook T: 0330 350 3356 @: hello@GrowingYourNumbers.com www: growingyournumbers.com
Creditor Days and Accounts Payable: If you purchase goods or services on credit, you are borrowing from your suppliers. Within reason your objective is to borrow as much as possible from your suppliers as this will both improve your cash flow and reduce the need to source external finance. There are a host of considerations with regards to the best, or most ethical strategy to adopt with regards to paying suppliers and there is a lot of abuse of power on the part of some buyers, but that is beyond the scope of this document, for now we are going to purely focus on the mechanics and the resulting impact on your bank balance.
In a nutshell, the sooner you pay your suppliers, the worse it is for your cash flow and your bank balance.
You would logically seek to negotiate the best possible payment terms and take as long as possible to pay suppliers for one simple reason, it will keep your money in your bank for as long as possible, but…
… it is not quite so black and white. Provided your business has sufficient working capital, you might be more profitable negotiating lower prices, and hence more profit in return for prompt payment. There are a number of very good reasons why not paying suppliers on time can have undesirable ramifications, not only for supplier relations, for example suppliers may refuse to work with you or cut your credit terms, which could be disastrous for cash flow.
Not paying suppliers can also have an adverse effect on your business ’ s
credit rating, which could have negative ramifications that we will cover in a moment.
As with many things in business, depending on circumstances, exactly what strategy and tactics you adopt may vary , but for the purpose of this exercise, we are going to assume ‘Cash is King’ and we don’t have the luxury of surplus cash and we need to find the optimum balance … What’s a Creditor Day? As with Debtor Days, each Creditor Day has a financial value. Using the business in the example business below, each Creditor Day is worth £2,530. Unlike Debtor Days, each additional day taken to pay suppliers has a positive impact on the bank to the tune of £2,530. If this were your business, and you needed to find £25,000 for your business, and each Creditor Day was worth £2,530, if you could find ways to make suppliers wait 10 more days before being paid, this would have the same impact as taking out a £25,000 loan.
Think of Creditor Days and Accounts Payable like this: You are lending money to your customers.
Putting the two together, if you needed to raise £50K, and your business was similar to the example below, then with an appropriate Credit Control process, you could potentially release £50,000 from your existing business, simply by decreasing Debtor and Creditor Days by 10.
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