The Credit Crunch – Paying bills on time

Sorry I cannot resist making a few comments as I see this affecting all of us.

In short it is more important than ever that Invoices are paid on time, many business and people in the UK simply do not do this, rather they wait until the last possible moment, this is fine when it comes to paying taxes, but here’s the catch.

It all comes down to cash flow and small business in particular tends to run their budgets tightly. If they run out of money for example when the VAT return is due, then this causes problems in other areas.

In the age of ‘free’ credit we have all become use to the idea of paying for things before they have been paid for. For example when you buy a T-shirt, there is every change the shop keeper has an account with a supplier who sends his Invoice after a given period with a 30 day payment requirements, this means technically it is feasible the shop keeper could have 60 days free credit, i.e. he sells the T-shirt 60 days before he has to pay for it.

So the catch comes down to this, at what point in the supply chain does the free credit occur, on the Internet this is more important than ever. Technical companies tend to have automated computer systems, payments tend to be immediate and this in turn puts pressure on people actually pay up front.

For this reason a group in the middle has cropped up, the resellers or if you prefer the shop keepers, this group gives 30 days payment services, but often they have to pay up front, they if you like take the risk on behalf of their clients. Clients and customer like it because they realise the benefit of a service before they have to pay for it, resellers like it because they usually take a profit on the service and the providers don’t mind because they get their money up front.

But what happens when bills are paid late… those middle men start to be squeezed, they are still paying up front for services that are taking maybe 30 days to be Invoiced and perhaps another 30 days due to payment terms and then when clients don’t pay it may take another 30-90 days before tempers begin to fray.

The risk is simple, if clients don’t pay, the risk that the shop keeper has taken on is exposed, he runs out of money often literally and the credit crunch arrives, payments are not made to suppliers and the original client loses his service. Imagine if domain names are lost or websites go down, the damage is actually critical to a business these days.

There is a real need for business and people in general to start a culture of paying on time or even early. We are currently learning the lessons of overextended debts and credit, services should be paid for straightaway there is actually no reason for them not to. Check runs in large corporations should be done daily not monthly… much tighter control of money can be obtained by doing so. Equally businesses that do operate immediate payment systems should spread their culture more to make this the normal practice.

With the credit crunch has to come a re-evaluation of how businesses pay for their services and the key criteria is not to owe money to anyone. It actually does not pay in the long run regardless of the size of the company.

My final comment is that paying on time helps all companies be much more efficient which in turns simply means they can provide cheaper services to their clients and in the next few months this will become increasingly important.

Thanks for reading this… paying bills on time is the single most challenging aspect of running any business.