In certain situations, Accounts Payables that are owed to vendors can act as a great way of bridging cash flow when cash is tight or when larger more complex issues are being addressed. For the purpose of this article, vendors can include anyone who provides a service or product to you on credit. Below are some tactics we recommend using to help the money you currently owe to vendors become a bridge to recover:
Determine how much and for how long you are going to ask payables to extend credit.
This is a simple yet complex topic and one which you need to be sure of as, from experience, you only get one chance to go down this path.
Depending on the severity of the situation, the amount you may need to push back may be a lot and it may extend for many months. In several situations, we have asked vendors to agree to a twenty-four-month repayment schedule on any past amount outstanding while providing our clients new credit to ensure the organization could continue operating.
Determine which vendors are critical, wherein they are essential for the company’s success and those that are non-critical.
Priority should be placed on vendors that are critical and less priority should be placed on those that are not. What we mean by this is simple; if the vendor is not easy to replace and the consequence of them not supplying you with products or services can hurt or even kill your business, they should be considered critical. Any other supplier, however important they may be, is likely replaceable and should be considered non-critical.
In many situations the repayment timeline for critical and non-critical vendors is going to be different. Generally, a harder line can be drawn with non-critical vendors and therefore it is important to determine the difference and treat them as such.
Determine the required payment structure per vendor.
It is very important that you be specific about how much you will be able to repay per month and how long it will take to clear off the account. Once you have determined this you can create a general repayment schedule on a vendor by vendor basis.
For example, we regularly work with clients who owe money to hundreds of vendors. To manage this we create a vendor repayment table with how much of the amount outstanding is going to be paid, to who and when. By using such a format, we can determine the total amount per month our clients can afford to pay based on company-wide cash flow projections.
Be Humble - Inform vendors via a personally addressed letter and follow up with a phone call or meeting.
Asking for additional time to repay a vendor is a gut-wrenching and humbling task. As hard as it may be, it’s nothing compared to explaining to a bank why you can’t afford to repay them or laying off employees because you are simply out of cash. It is not fun but asking for help can go a long way.
Fortunately, vendors are often open to the idea of working with their customers to ensure that they can both get paid in full and build a stronger more loyal relationship going forward. In fact, you will find that in many situations vendors and the leaders of these companies have gone through similar situations themselves and understand the challenges you may be facing. They are often eager to help you through the challenge.
It is essential however, that during this time you create a level of trust and credibility otherwise your attempts may be in vain. One of the best ways to do this is to ensure you have built a solid plan on how to get through the situations you face and communicate your plan forward (how you will be moving through and out of the situation in front of you).
Follow Through is critical.
If the intent is to continue working with many of your vendors in the future, then this step is arguably more important than any other.
If a vendor has acknowledged your plea for help and is willing to work with you then it is critically important that you live up to the promises you have made. In many situations, we have found that relationships have actually improved with vendors during such times as both parties can come together as business partners, which goes much further than your traditional vendor relationship.
Going down the path of using payables as a cash flow bridge is not always easy and inherent with risks, which include rejection of your attempts from vendors, lawsuits and a damaged reputation in the market. However, when times are tough and paired with the right strategy to turn the business around, using payable as a cash flow bridge can prove to be a saving grace for leaders.