Any business can, at some point, run into a temporary cash shortage for all sorts of reasons, sometimes simply because other people owe us money and we can’t meet our payments to suppliers. The due dates of our promissory notes at the bank are approaching (in Spain, suppliers are often paid with pagarés, notes they present at the bank on a set date), and we’ll have to let some of them bounce in order to pay others. Other suppliers will come round to collect in cash; some we’ll be able to pay on the spot, while others will get the usual “come back next month, I can’t this month.”
Few business owners follow any strategy when deciding which supplier or company they’ll leave unpaid. Sometimes we pay whoever turns up first, sometimes we pay the oldest debt, and sometimes we pay the one we’re friendliest with. Likewise, and conversely, we sometimes take advantage of trust and put off paying the person we’re closest to.
I once knew a businessman who didn’t like to leave anything to chance. He would spend a few hours working out which companies would get paid and which wouldn’t, based solely on the damage to his image. Because even without the internet, word of mouth spreads just as effectively among suppliers. If word gets around that we have trouble paying (that we’re bad payers), things can get very ugly. This man had his own payment algorithm.
1. The amount of the debt
Where I come from there’s a saying:
“May God spare you from many small debts and bless you with a single big one.”
Imagine we are waiting for promissory notes from 40 different companies to fall due, for a total of €100,000, and we only have €40,000 to pay them. Imagine one of those notes is for €60,000. By default, that is the note you should let bounce (as a general rule), because out of 40 creditors you’ll leave only one unpaid. If you paid that note, you would probably leave more than 30 unpaid.
A supplier can speak badly of you to other suppliers, but if it’s only one, the rest can say they have no problems with you, and they may even think it’s a passing, temporary situation. That person might even badmouth your company online, and many people would think it’s someone who wants to hurt you, since nobody else is complaining. On the other hand, 30 suppliers badmouthing your company and basically announcing that you owe them money is far more likely to spread, even if the amounts are only €50.
2. The supplier’s influence
We mean influence in every sense. Clearly, if a supplier is also a customer or supplier of other companies that supply you, the rumour would soon reach the rest. Likewise, if you’ve ever met a distributor for lunch and he spent the whole meal talking about customers who don’t pay him, you know he’s someone you need to pay off as soon as possible.
3. Geographical area
If you operate in Madrid and you have a supplier in La Coruña, you’d probably rather have a bad reputation in La Coruña than in your own area (Madrid), especially if you have no plans to sell in La Coruña.
4. The age of the debt
When we’ve owed money for a long time, the supplier grows desperate, and a desperate person may take legal action, which we must avoid at all costs, because legal action makes a lot of noise.
5. Should we rely on friendship?
Trust or friendship could be a matter for debate. Most people lean on that friendship, thinking the friend will be more understanding and won’t cause trouble, but supplier friends often turn the secret into a public announcement and damage your image far more than your own competitors would.
6. Do I pay suppliers or employees?
Needless to say, employees must come first, because they are part of your company (as if they were your children). Even so, there may be specific situations in which we should sit down with our employees and ask them to understand something: sometimes, if we don’t pay a supplier on time and things reach a critical point, that supplier may cut off a product that is essential to running the company. When that happens, it’s better for an employee to suffer a delay than to let the company go under, because then the whole workforce would end up unemployed.
According to this businessman, these are the questions to analyse to make sure we don’t let the wrong promissory note bounce. They are very simple tips that follow a logic you probably all know, but it never hurts to be reminded.
Further reading
- Ideas for giving your company a new image
- How to start a business with no money
- Tips for choosing a business partner
- Why new businesses fail
Featured image: Joanbanjo, CC BY-SA 3.0, via Wikimedia Commons.
