By Jon Tatum, HoganTaylor Consulting Manager
We all know that customers and the revenues they generate are the lifeblood of any business, but vendors are also critical to success. Many companies fail to nurture vendor relationships with open and honest communication. Then when difficult times come, there is insufficient rapport to work through the issues successfully.
When cash flow becomes tight and paying vendors on time becomes a challenge, company owners and or financial professionals within the company often stop communicating with their vendors. This is a big mistake. Vendor relationships should be viewed as a partnership built firmly on respect and trust. This relationship may be forged easier with smaller “mom and pop” vendors than with large national vendors, but both types should be treated in the same manner.
Companies expect quality products and services from vendors. Vendors expect some level of loyalty to predict order flow as well as timely payments to prevent excess borrowing. When either side fails to keep its commitments, trust erodes and the relationship is strained which inevitably snowballs to even more challenges.
When managing vendors, particularly during difficult economic conditions in your business, we recommend the following seven steps:
7 Steps to Weather a Storm with Your Vendors
- Communicate in both the “good times” and “bad times”. Even when times are good, an act as small as a phone call to place an order or an inquiry on how things are going with the person on the other end of the phone goes a long way. That simple gesture says you care about them and helps forge a positive relationship. In the “bad times” (i.e. sales have dropped off; cash flow is difficult, etc.) a call to the vendor also says you care about them enough to let them know what is going on with sales and cash flow and that payment may not be as timely as it has been in the past. You do not have to divulge all the details of the issues your business facing, but you can tell a vendor you are experiencing slower than normal collection activity, which is resulting in slower than normal payment remittance.
- Honesty. Honesty is the foundation of trust and no relationship is truly healthy without trust. When you are proactive and honest and prepare a vendor for a slower than normal stretch of collections, you are establishing that you can be trusted in all circumstances. Often, economic conditions, product quality, sales decline, etc. get worse before they get better. With a high level of trust, you will be in a position to negotiate more favorable arrangements with vendors if, in fact, things do get worse. Keep your word with regard to when payment will be remitted and the amount of payment you expect to send. If you cannot keep a commitment to pay when you said you would, call and say so.
- Have a Consistent Message. Designate one or two people within your company to manage vendor relations especially in the “bad times”. If more than one person is involved (owner and accountant, or accountant and accounts payable clerk), circle internally weekly or more often, as needed, to discuss the accounts payable aging report and the expected cash flows for that week. Decide who will communicate with the vendors and agree on what will be communicated. It is best for the vendor to receive updates from the same person consistently.
- Work from an Aging Report. Most companies are familiar with an Accounts Receivable aging report, but many do not effectively utilize similar reports when managing through a period of cash flow distress. The A/P aging report will make it easier to prioritize payments based on the age of the account, size of the amounts due and the criticality of the vendor to current operations.
- Pay Off Smaller Dollar Balances. When paying vendor invoices, knock out the smaller dollar amounts first. As we all know, when invoices are not being paid on time vendors start calling. To reduce the number of calls and the related interruptions and distractions, pay off as many vendors with small balances as possible. It will not take much of your available cash to keep 80% of your vendors from ever calling you. This will allow you to focus on managing your most important vendors using the tools suggested above.
- Pay Something to Indicate Good Faith. Partial payments are a hassle for both you and the vendor but paying “something” is almost always better than paying nothing. Larger national vendors may balk over not receiving payments in full, but our experience has shown that, even with larger vendors, a partial payment will go a long way to buying time and maintaining trust.
- Avoid Getting Sent to Collections. Do the best you can to keep the vendor from escalating your account to an outside collection firm or an attorney. The agency’s efforts will likely be more intensive than the vendor’s and therefore will take up more of your valuable time as you continue to manage your way out of a cash flow crunch. If your account is transferred to an attorney or a collection agency, maintain a calm, professional level of communication and continue to be honest about what you can and cannot do to alleviate the problem.
Managing key relationships is one of the many challenges of working through a period of slow cash flow. If you are experiencing a period of acute or ongoing cash flow issues, consider bringing in an outside professional to access the financial health of the business. Our experience is that the sooner you bring in a professional the better chance you have of overcoming the challenges.