Friday 30 September 2011

Cash Flow Management - Creditors

In the last issue we discussed saving and the stabilising factor it is for a business. Saving is often hampered by overdue Creditors.

A general perception is that, creditor's payments should be delayed for as long as possible. Although delaying creditors sounds like a logical solution to helping cash flow, the benefit is only realised in the first few months of a business. 

In professional entities, there is very little affect on cash flow. Only disbursement creditors could be delayed, within reason. Once a client pays, the disbursements can be paid for without impacting on the business overdraft.

If a product is manufactured from parts purchased from creditors and then sold as a finished product, there is worth in delaying the payment of the creditor until such time as the product is sold.

Business' are declared insolvent when they are no longer able to pay there creditors. They are technically insolvent when the current liabilities are higher than there current assets. Maintaining a balanced creditors ledger and paying creditors regularly will:
  1. Improve credibility with creditors;
  2. Open the opportunity for early payment discounts;
  3. and place the business in a strong financial position to build credibility with the bank.
The creditors ledger should be updated regularly. This will help identify what is due. The expenses on the income statement will be up to date and profitability can then be reviewed accurately. A good system will include the monthly review of creditors to determine the cash needed in a month for creditor payments. Planning for early payment of creditors will alleviate pressure on the bank overdraft at certain times of the month.

Creditors should be paid sooner rather than later.

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