The Importance of Having Sensible Payment Policies

Some business owners have never thought about having a payment policy. Deadlines on bills, wages and taxes come and go; amounts due get paid as soon as possible. When available cash doesn't cover it, the deadlines slip.

But this can be expensive and make the situation worse. Penalties for late tax payments can be severe. If you don't pay your employees on time, you won't keep them long and morale and production will slump. If you don't pay your suppliers on time, they can hit you with late payment interest and will be far less happy about doing business with you.

A Policy for Commodity Suppliers

A payment policy on suppliers should start at the beginning of your relationship. You'll make choices based on their reputation for reliability and quality, how much they charge and their normal terms for payment. If the latter is likely to make problems for you, you may be able to negotiate. This will be easier if they know you have lots of choice among their competitors, and if you have set a general policy for payment in, say, 30 days from date of invoice.

Don't forget to communicate your payment policies to your outsourced bookkeepers, then they can check that they are being adhered to and are working well. Another option for a general policy is to set a monthly payment date. It could be, for example, the nearest Friday to the 15th of the month, or the second or third Wednesday for paying all invoices dated in the previous month. For some supplies this could give you an extra week or two to pay, and the suppliers will know that, if they don't invoice you before the end of the month, they'll have to wait longer for the payment.

As long as your suppliers have been made aware and agreed to your terms, they will know when to expect your cash and will not hassle you beforehand. When you normally pay up as expected and work at maintaining good working relationships with them, if you run into occasional cash flow problems, as long as you warn them, most suppliers will be sympathetic and give you some leeway.

A Policy for Vital Payments

There are bound to be some creditors who won't play ball with your general policy and could make things difficult for you if you don't comply with their terms. You need to identify these for priority payments. You don't want to your landlord to start eviction proceedings on non-payment of rent, or the local authority to sue you for non-payment of business rates. Utilities providers are important too or services could be cut off. Your bookkeepers can help you make sure all these payments are made on time, as well as all the different tax payments that have different deadlines month by month and year by year.

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