Delayed supplier payments are a constant issue in the supply chain, particularly for smaller players. The global pandemic has only worsened this problem. Regardless of the product or service, a key ongoing task of any business is cash flow management.
Manu businesses spend most of their time on net income or earnings, but the simple reality is that cash is king. Paying your suppliers on time through cash or ensuring payment through a standby letter of credit not only ensures a good working relationship but can lead to extra benefits along the way.
Here are just some of the positive effects derived from paying your business suppliers on time.
A more trustworthy partnership
Payment practices show the strength of your relationship with suppliers. On-time or early payments build trust and improve suppliers’ confidence in you as a business partner.
Developing a reputation for paying suppliers on time makes you an attractive company to do business with. It can also place you on a higher priority list if an essential product, component, or service becomes short in supply. Prompt payment also puts you in a position of strength and allows better deal or more business in the long run.
Negotiate better deals
Suppose you have an existing good and honest relationship with your suppliers because you pay on time. In that case, you might have an opportunity to negotiate a better deal than your previous one. This benefits your bottom line and boosts the quality of the product/service you acquire. You could also use this as an opportunity to benefit from a new deal mechanism.
Lessen supply chain disruption
Missed or delayed supplier payments can cause disruptions to cash flow and interrupt the material flow in the supply chain. If you don’t pay a supplier on time, they might need to find money from somewhere to meet their costs to ensure that products aren’t going out faster than payment coming in.
During disruptions, knowing that you have a steady source of material for your supply chain will minimize your worries around late supplier payments and being left without required supplies. Removing this late payment constraint will also aid with planning and keep cash flow moving through the supply chain.
Eliminate employee burnout
High-stress levels and low employee morale are significant effects of delaying supplier payments. When your business is at fault for late payments, your employees need to accomplish ‘damage control. Irate supplier calls tend to land on your employees, and they must deal with it along with the already compromised processes.
Bottlenecks from late supplier payments can also cause issues with a finance department. An overburdened team can have a domino effect that leads to more late payments. This stressful situation puts finance under pressure and may lead to low-quality output and employee burnout.
Remove disputes and ease issues
If late payment has resulted in financial issues for your supplier or aggravated them, they may be unwilling to accept the next order, or it could even end in a dispute which harms not only the relationship but also your inventory. If their products or services are essential for you, you must try to make supplier payments within the terms or use a standby letter of credit to protect that relationship.
Early pay is an often undervalued yet extremely efficient way to create economic value for buyers and suppliers. Ultimately, it allows buyers and suppliers to enhance collaboration and improve financial stresses to grow their businesses.