Creditors are a useful source of finance for your business but an area over which you must have control.
Creditors are people or businesses your business owes money for goods or services supplied. By getting access to their goods or services before paying for them, you can generate income. You want to try and reduce the time between when you pay and when you get paid.
You should have good relationships with suppliers and pay bills when they are due (not early or late). The better the relationship, the more chance the supplier will accept rush orders, take back excess stock, and offer specials. Having a reputation for being a late payer may restrict your access to credit.
Are you managing your creditors effectively?
You should review outstanding creditors regularly. Most accounting software packages allow you to produce a list of creditors organised by when payment is due. Or sort your unpaid bills by their due date to spot any near or past their due date. If you are having trouble paying all creditors on time pay critical suppliers first. Ask other creditors for longer payment terms or if they will take back stock.
On the flip side, if you have the ability to pay early, ask for a discount. When choosing a supplier, consider their credit terms, as well as their service, prices, and the quality of their goods or services.
A simple ratio to use is Creditor Days Outstanding. It is total creditors multiplied by 365 (days), divided by annual purchases. Focus on the trend over time rather than a specific number. You want it reasonably stable or trending upwards to show you are increasing your use of creditors to fund your business. Just don’t overdo it.
Greg Taylor is Chief Financial Officer for the Hunter-based Greater Building Society. This article appeared in the Newcastle Post 20 June 2012