Many companies run into cash flow problems at one point or another. This brings up the question: “Who gets paid when?” Accountants offering cash flow management advice will often counsel business owners to get paid as quickly as possible while getting the most favorable payment terms possible on money they owe others. So, who gets paid when?
Below is a brief list of what you should tell your clients to prioritize:
Federal payroll taxes, Social Security and Medicare payments: The reason is simple: The money isn’t yours. Your employee pays it, and you collect it on behalf of the government. State sales tax fits in here too. Ditto state income taxes collected. I’m adding one more into this category: employee retirement plan contributions. They designate dollars to go into their 401(k), which you maintain on their behalf. The IRS indicates this money must go into the plan, generally within 15 days of receipt.
Unpaid bills near the 60-day mark: That’s the critical threshold. Bills owed beyond 60 days affect your business credit rating. This can make it difficult to borrow money in the future. Although business owners might think in absolutes (“Pay or don’t pay”), you can counsel them setting up a payment plan or making partial payments is preferable.
Rent, gas and electricity: You’ve heard the old joke: Someone flips a switch. It’s still dark. Another person says, “Didn’t you pay the electric bill?” Utilities do turn off services to businesses. Landlords evict business tenants for non-payment or rent. The timeframe for eviction for non-payment of rent is probably spelled out in their lease.
Strategic suppliers: You can’t run a business if you don’t have product to sell or raw materials for manufacture. The last thing you need is supply chain disruption. This is an example where long-standing relationships with a few suppliers is better than constantly switching to get the best price. They will likely work with you, altering payment terms.
Secured loans: If you default on a mortgage, the bank wants the building. If you borrowed money to buy equipment, the lender or supplier wants their equipment back. Once again, if things are tight, try to work with them.
Insurance: It’s a bill you pay for a product you hope you never need to use. After some time, you wonder if you’ve been throwing money away. Can you skip this one? Are you legally required to carry it? Vehicle insurance is a good example. Work with your agent. Raising deductibles or reducing coverage should lower premiums.
Bills, big and small: Many small businesses think when a big company gets into trouble, it’s the smaller guys they owe money to that feel the pain. Don’t be part of the problem. Although skipping a big bill might hurt your credit rating, the small guys are in the same boat as you are. Try to give everybody something. Work with them.
Credit cards: They are structured to let you stretch out payments. OK, so the rate is 12 percent over the prime rate. As long as you make the minimum payments on time, they think you are a fine investment. Watch out for the penalty rate if you’ve missed payments for 60 days. That can be close to 30 percent.
Other stuff: There’s “nice to have” stuff. You get those bills, too. You belong to the chamber. The business makes charitable contributions when those letters arrive. Most of these can be deferred.
Your small-business-owing client is feeling the squeeze. You’ve heard the expression: “When you find yourself in a hole, the first thing to do is stop digging.” Your client realizes bills fit into three broad categories. Ones that need to be paid to keep the lights on; some can be paid in part, and very few can be put off until better times. In many cases, the major guidance is paying something is better than paying nothing.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.