Collect fast, pay slow is a popular accounting mantra, but it's not necessarily smart business.
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At the end of the day, there's karma in business. What goes around comes around.
Instead of optimizing your accounting processes to improve cash flow at the expense of your vendors and customers, try taking a different approach and see what happens.
Pay Fast, Not Slow
As you probably know, one of our portfolio companies is a marketing service firm.
Some clients pay us rapidly and other clients pay very slowly.
Guess who gets the best service?
We take much better care of the fast payers. That's because we appreciate that they appreciate our circumstances.
One client gets an electronic invoice on Monday and has a check to us by Wednesday of that same week. We really appreciate that and we go the extra mile for that client. We will prioritize their work over that of our slower-paying clients.
Remember, for a small business, getting paid quickly can mean the difference between struggling to make payroll and not having to worry about making payroll.
If your supplier is worried about making payroll and paying their bills, simply because you decided to stretch them for an extra 15 days on payables, it's going to distract them from doing good work for you and others.
Why not make their life a little easier by paying sooner, rather than later?
Sure, you yourself may get into situations occasionally where you cannot pay quickly. But at those times when you can pay quickly, do so. You'll find that the return on that quick payment is much greater than what you will make on that little bit of bank interest.
Collect Slowly, Not Quickly
Collections is just the other side of the same coin. While it's generally wise to collect on receivables as quickly as possible, sometimes it's a smart move not to pressure your customer too much.
As discussed above, a small business customer will run into cash flow challenges frequently. Rather than bang on them for payment, call them up and say "If things are tight, feel free to take an extra 30 days to pay our invoice."
Imagine the goodwill that will gain for your business. Do you think that customer will ever switch to the competition. Not likely!
Empathy Is Important in Business
Maybe you don't feel like giving your customers or your suppliers a break? You're one of those people who believe that nice guys finish last.
Take a moment and rethink your decision. It's empathy that makes for successful business leaders. People who are able to understand the needs of others have been the key to making the top businesses the best in their categories.
So even if your MBA professor tells you to "Collect fast and pay slow," don't believe his or her conventional wisdom.
Instead try a different rule: the Golden Rule.
Do unto others as you would have them do unto you.
It's smart business, and it will send some good business karma your way.