For a startup company that is growing its business aggressively, cash flow is always tight and therefore prioritizing cash payments is necessary.
Most startup businesses in their early days delay supplier payments to fund growth and meet other critical payments. It is important to realize that if you want to delay payments to suppliers it is very important to carry them with you. Suppliers must feel that they have a stake in your success. With your success, they will succeed as well.
Payments to meet monthly salary, rental, utility and communication bills have to be provided for every month without fail. I remember many meetings with my finance head, trying to figure out which supplier to pay and when and how to prioritize payments so that the supplies would not suffer and the suppliers would be happy!
Each time payments were delayed the rumour mills would start working overtime and I would start getting feedback that our suppliers were nervous because they had heard that the company was closing down or that I had sold off the company.
Suppliers are also businessmen and know that delayed payments do not mean that their money was not safe – they simply wanted confirmation of the delayed payment so that they could plan their own cash flows better. Once we had given them a fresh date and if we honoured the revised schedule, they would happily fund our short term credit needs in future as well!
In order to reinforce the confidence of our suppliers, I used to hold meetings with them in our offices and over a cup of tea accompanied with one Samosa and one Pastry, I would explain to them that the company was growing fast and that their payments would be delayed for the next few weeks. Every supplier always supported us wholeheartedly throughout our journey.
On the other hand, there were distributors of some of the big brand fast moving consumer goods companies who would simply not accept any payment delays because they knew that the consumer demanded their products from our stores. We needed these distributors and suppliers more than they needed us and we made sure we never delayed payments to them.
Whenever we delayed payments beyond the agreed norm, and this did happen several times, a few suppliers would stop supplies to us.
The moment we would start ordering goods from another supplier, I would receive a complaint from them stating that we had stopped buying from them and that their business with us was reducing!
They did not want to stop supplies to us! At best they would try and reduce the margin they offered on the supplies to compensate for their funding cost. The moment payments started regularly, the margin would be restored by our suppliers.
Suppliers understandably want payments on time but they do not want to stop doing business with the company. This was a clear indication to me that they trusted the company, they trusted our business and most importantly, they trusted our dream.
We stretched the payments to the suppliers but we never let the relationship break. As a wise man once said “Stretch the thread of a relationship as long as you can but don’t let the thread break. Once the thread breaks, no matter how hard you try to rejoin the parts, there will always be a knot in it”
The author is the Chairman of Guardian Pharmacies and the author of the bestselling books, The Corner Office and The Buck Stops Here. Twitter: @gargashutosh