Executive Briefings

When Should You Pay Your Suppliers - Early on or Only When Payment Is Due?

Is it wise to take advantage of early-payment discounts offered by suppliers? Or should you make other use of your cash until payment is due? There are lots of things to consider.

To decide whether to take advantage of early-payment discounts or keep on holding our cash for a bit longer, start by asking some fundamental questions:

1: How quickly will the invoice make it to accounts payable?

2: What process (if any) will AP go through to confirm the bill is accurate?

3: What process will AP use to confirm we got what we ordered?

4: Who needs to sign off?

5: When can a check be cut or electronic payment initiated?

If we can make it through those five steps quickly —in less than 10 days, say — it typically will be worthwhile to part with our money earlier in order to send a little bit less than we otherwise would have a few weeks from now.

If it takes longer to work through the process, there is another choice to make: Do we pay as soon as the invoice has been processed? Or do we take the discount anyway? Assuming we’re able to control when payments go out (i.e., we have some check in place in between invoice approval and payment authorization), the answer to the first question is an emphatic NO.

The answer to the second question should be “no” as well, for two reasons. First, taking unearned discounts while still holding onto our cash is ethically and legally (though not criminally) wrong, of course. Second, because the discount was unearned, our supplier will have a valid claim against us — we really do owe them the full amount, even if they accept the partial payment. We’ve already agreed to the terms; sending a different amount doesn’t equate to a counter-offer. We may be placed on credit hold, preventing future orders until the deficiency is made up; or we may just see that balance carry over to the next invoice.

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To decide whether to take advantage of early-payment discounts or keep on holding our cash for a bit longer, start by asking some fundamental questions:

1: How quickly will the invoice make it to accounts payable?

2: What process (if any) will AP go through to confirm the bill is accurate?

3: What process will AP use to confirm we got what we ordered?

4: Who needs to sign off?

5: When can a check be cut or electronic payment initiated?

If we can make it through those five steps quickly —in less than 10 days, say — it typically will be worthwhile to part with our money earlier in order to send a little bit less than we otherwise would have a few weeks from now.

If it takes longer to work through the process, there is another choice to make: Do we pay as soon as the invoice has been processed? Or do we take the discount anyway? Assuming we’re able to control when payments go out (i.e., we have some check in place in between invoice approval and payment authorization), the answer to the first question is an emphatic NO.

The answer to the second question should be “no” as well, for two reasons. First, taking unearned discounts while still holding onto our cash is ethically and legally (though not criminally) wrong, of course. Second, because the discount was unearned, our supplier will have a valid claim against us — we really do owe them the full amount, even if they accept the partial payment. We’ve already agreed to the terms; sending a different amount doesn’t equate to a counter-offer. We may be placed on credit hold, preventing future orders until the deficiency is made up; or we may just see that balance carry over to the next invoice.

Read Full Article