This month’s article on cash flow management takes a look at credit terms, and how you can use these to your own benefit without having a negative impact on your supplier relationships.
This is the eighth part in our ongoing series on cash flow management, you can read the previous articles here:
- Part One: Cash Flow Basics
- Part Two: Failure to Plan is Planning to Fail
- Part Three: Those Who Shout Loudest Get Paid First
- Part Four: Must Have or Lust Have
- Part Five: Working Capital – Make it Work for You
- Part Six: Shelter Your Assets
- Part Seven: You’ve Got to Innovate to Accumulate
Part Eight: Treat Your Suppliers Like a Bank
The PPC was established in 2008 and outlines the standards for payment practices between organisations of any size and their suppliers. It’s administered by the Office of the Small Business Commissioner (SBC) on behalf of the Department for Business, Energy and Industrial Strategy (BEIS).
Code signatories undertake to:
- Pay suppliers on time, within agreed terms;
- Give clear guidance to suppliers on terms, dispute resolution and prompt notification of late payment;
- Support good practice throughout their supply chain by encouraging adoption of the Code.
In January 2021, the code was strengthened by various additions, including:
- Confirming the requirement to pay 95% of invoices within 60 days
- Introducing an added requirement to pay 95% of invoices from small businesses (with less than 50 employees) within 30 days
- Requiring signatories to recognise the right of suppliers to charge late payment interest and charges if an invoice is paid late with justification
Becoming a signatory is voluntary and businesses are required to report on their payment practices. Signatories can be suspended or removed if their payment practices are challenged.
Extend Supplier Credit Terms
Supplier credit is often the cheapest form of finance as it’s usually interest free. You can often push the limits of your credit terms without causing too much of a negative impact on either the relationship or your supplier’s financial situation. When necessary, you could pay a 30-day invoice in 45 days, or a 45-day invoice in 60 days.
Most businesses expect a small delay in receiving payment for their work, and often invoice immediately to avoid facing financial difficulty when an invoice is a week or two late. However, it’s important to remember that your suppliers are in the same boat as you—they rely on money from their sales to pay their own overheads, so don’t push your luck or you could find yourself in need of a new manufacturer or delivery provider.
The next post in our cash flow management series, Take Stock of the Situation, will look at your physical stock and how you could improve cash flow by managing stock carefully and invoicing immediately.
Don’t want to wait? Click here to get our guide, Happiness is a Positive Cash Flow and read all our tips and advice for achieving and maintaining a positive cash flow.
Get in touch to discuss your individual circumstances and get some independent, impartial advice on your business’s financial health.