Net 30 Payables – An Interesting Concept
The original design and intent of paying invoices in 30 days was to allow for open accounts that provided for faster and more efficient transactions between businesses thereby minimizing paperwork, check writing and monetary exchange.
If Net 30 is a good concept- than Net 45 or Net 60 must be better – Right?
Nothing is further from the truth!
Business generates revenue through a service or a product. This requires cash; there are initial investments, a business plan, projections, benchmarks, and goals. When the plan is sound and executed properly the cash is managed, profits are made and the business grows and can prosper. On the other hand when management does not plan properly, does not manage their affairs well profits and cash flow can and will suffer. A profitable business can go out of business for lack of good cash flow.
The question is what to do about poor cash flow? It’s entirely proper and ethical to ask suppliers to extend terms to 45 or 60 days or longer for a very specific period of time. We have done this on two occasions during the past 13 years, one for 90 days and once for 120 days. At the end of the period we returned to Net 30. It was part of a specific structured intentional plan to get our cash flow back on track. Not every supplier agreed to the short term change in terms, and that’s fine. That is a business decision that they need to make based on their own business plan and circumstances.
Managing cash is intentional; it requires attention to detail and involves every aspect of the organization.
The United States has a major credit problem that has made its way around the world. Poor credit decisions have crippled the US economy as well as those of other countries. Credit is a catalyst and can also have devastating effects when mismanaged. The manufacturing sector of our economy has primarily been a cash sector operating on Net 30 for decades, we’ve done this successfully. Further, our suppliers and vendors, whether they are raw material sources or the telephone company, all expect to be paid on a monthly basis. So do our employees as they have bills to pay that are likely to be Net 30 as well. Reducing our ability to pay them on time forces them to run up their own credit debt.
Our 2009 slow economy has also reduced the bottom line for almost everyone. Commodities are on the rise again and growth this year will be flat at best. As we turn the corner from this economic downturn, companies that have managed cash well will emerge stronger and ready for growth and a greater market share. Those companies that emerge cash poor or in greater debt will not be in a strong position to resource the expected growth.
If you have mandated Net 60 days to your suppliers, then as a supplier I believe that you have poor cash flow. To ask for extended terms when they are not needed is dishonest and unethical. This is also contrary to building strong relationships with customers and partners as this decision weakens your position as a partner.
The result will weaken your place in the market in the long run. Net 60 is a simplistic approach, it didn’t take any creative thinking, and there isn’t anyone to pat on the back for strong leadership. I don’t expect my suppliers to fund my operation, that’s my responsibility and I have a line of credit with my bank for that. We recognize that using that line of credit adds cost to our operation, and we use it carefully.
It’s very misguided advice to think that our manufacturing industry will be better positioned and stronger operating on credit. Credit has a funny way of removing limitations that otherwise are the benchmarks for using cash properly to facilitate growth and stability especially in a down economy.
Copyright 2009. Steve Gilbertson. All rights reserved worldwide. Used by permission