Vendors and Baby Steps
Brad is a small business owner with $300,000 in gross sales. He makes a lot of purchases with vendors using net 30 terms. How do those fit into the Baby Steps?
QUESTION: Brad in Knoxville is a small business owner with $300,000 in gross sales. He nets $50,000 a year and has $110,000 in total debt. He makes a lot of purchases with vendors using net 30 terms. How do those fit into the Baby Steps?
ANSWER: They don’t. You should have the cash flow to cover them, or you shouldn’t be doing purchases. That’s just like having an electric bill; you need to pay the electricity. If you order stuff from a printer, you don’t prepay it. You pay it when it comes in. They drop the stuff off and leave you an invoice, and you pay it within 30 days.
We generally clear those in eight to 10 days if everything was all right on the purchase order and the quality was there because the order met our specs and everything. If we don’t have the money, we don’t order the stuff. We’re not hoping we can sell it after they get it here to pay them. That is planning debt and riding on the back of your vendors. We have the money here so that as soon as it clears accounting and goes through the purchase order system and everything, then we cut checks the following Tuesday.
You are doing a good job of planning your cash flow. As long as you plan the cash flow like that, it’s fine. We’ve bought stuff where we didn’t have the cash there right that second, but we had a pipeline full of receivables that were steady and predictable in coming in, so we didn’t get ourselves in trouble. You just don’t want to get in a cash flow bind that ends up getting you in debt. But it is normal course of business to clear stuff in 30 days.