Are You Your Own Worst Financial Enemy?
This week, I received an email from a major resources company that we supply to. The email was followed up by a personal phone call from our contact within the company.
The same email was also sent to all the contractors to that particular project, and I was quite surprised when it arrived in my email Inbox.
The purpose of the email was to ask all their suppliers to send their invoices as soon as possible after their goods or services have been delivered. The company had been previously receiving invoices from suppliers up to 3 months after the work had been done.
The reason I was surprised was that our company always submits invoices as soon as we possibly can to get the cash!
Now you might think that this is a silly idea on the part of the large company. Wouldn’t it be better for them to just leave you alone, and pay you later when you finally get around to putting in your invoice? They have had the benefit of your products or services, which have helped them to make money — without paying for that benefit.
Effectively, what you are doing is loaning them your money.
So why do they want your invoices early?
It all comes down to a thing called “accruals”. I don’t want to make this post an accounting lesson (I’m certainly not an accountant), but bear with me for just a minute while I explain.
Many Small Businesses think in terms of “cash” accounting. Cash comes in when it comes in, and goes out when it goes out. Simple.
Most large organisations such as this major resources company, however, use “accrual accounting”. As best they can, they try to make sure that their financial statements for any time period contain the revenue that was earned (rather than actually received), along with the expenses incurred to make that revenue, even if they haven’t been actually paid for.
This way they have a more accurate picture of what they have earned, and what it has cost them to earn it.
So, if the resources company has some work done by a contractor in June, but the contractor’s invoice doesn’t get paid until July, the company needs to “accrue” for that amount. Even though the invoice wasn’t paid, the cost of that work is in the books for June.
Unlike cash accounting, keeping accrual financial records takes quite a bit of work, and there are entire departments of people whose job it is to make sure all these records are accurate. Contractors who don’t submit invoices for months after the work is done play havoc with the company’s financial statements when the amounts owed have not been “accrued for”.
Cash flow planning
Those of you in business know that cash flow is king, and a major resources company has an extremely large cash flow. All those accountants that I spoke about in the paragraph above make sure that the cash flow is calculated down to the finest possible detail.
All that cash flow planning goes completely out the window when a large, unexpected invoice (that hasn’t been “accrued for”) turns up some months late.
But don’t they pay late anyway?
The answer to that is yes. In fact, Australian businesses are officially the world’s worst at paying bills on time (average 26.4 days late) according to research by Market Invoice.
The worst offenders are large companies (those with more than 100 employees) – paying on average 44 days overdue.
The worst of these large companies are mining companies, large supermarket chains and transport companies.
What should you do?
The fact that large companies are the worst at paying their bills on time should give you even more incentive to get your invoices out your door and into your customer’s Accounts Payable section as soon as possible.
Your employees won’t be waiting for their rightful pay, and your suppliers probably won’t either. Certainly, the Tax Office won’t wait. You will have to have the cash to pay all these people – or borrow it.
I’ve written previously about some tips for getting paid earlier. Getting your invoices out immediately is the most important tip.
I’ve also written about the importance of maintaining a good relationship with your customer. Having your main company contact harassed by their accountants because you aren’t putting your invoices in on time won’t help your continuing relationship. If your tardy accounting is going to cause them grief, they will certainly start to look elsewhere.
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