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> They pay eventually, but late to improve cash flow. I‘ve never understood this. If you stretch creditors out to say 120 days, then you only gain the differen

> They pay eventually, but late to improve cash flow. I‘ve never understood this. If you stretch creditors out to say 120 days, then you only gain the difference in value between the amount owed today vs the same amount in 4 months, which is next to nothing. Once you’ve stretched a creditor to their limit, your payments occur at the same frequency as they would if you didn’t stretch them. So it provides a very marginal one-time benefit, at the cost of pissing off companies you need. I mean, stretching creditors will make your bank balance look fatter, but it doesn’t mean anything because the trade creditor liabilities will remain on your balance sheet, and it’s your balance sheet that counts. Of course, it might be desirable to have cash in the bank if you’re sailing close to the wind, but you’ll be sailing close to the wind when those debts become past due, too.

hef19898 4y ago
Cash flow is differwnt from overall profit and loss. Stretchibg payment terms doesn't help you with the latter, it certainly does with the former. Assume you get your money from clients faster than you pay your suppliers, something quite common in retail. One can be profitable and cash positive (best place to be in), cash positive and unprofitable (acceptable, especially for growth-focused businesses), cash negative and profitable (kind of ok-ish assuming some reliable backing by banks to cover any cash constraints) or cash negative and unprofitable (the by default dead category, excluding VC money I have the feelong a lot start and scale ups fall in this category at the moment).
Closi 4y ago
It’s about cash flow - plenty of fundamentally profitable companies go bust because of short-term cash flow issues, so if you can give yourself an extra two months leeway from a financial perspective that can be huge for survival. Another simple way to look at it: If I am buying 10,000 widgets for £80 each and expect to sell them for £100 across the next three months, I either need to have £80,000 sitting in the bank that I then tie-up in phones, or I agree to pay £80,000 in three months (maybe it is then £85,000 due to credit terms) but then I can sell the phones before I buy them. It’s a minor example, but if you imagine you are a growing retailer and employ this strategy you can grow much faster than another retailer who doesn’t (and has to tie their cash up in stock). Above examples are very simplistic because it’s about stock, but same logic can be applied to other purchases - most cash spend a business makes should presumably deliver some sort of value, so paying later allows some of the value to be realised before payment is required. This is why cash flow is king.
- doctor_eval 4y ago
  Yep this makes sense, thanks. My background is SaaS services where you have long term contracts payable monthly. I don’t think there is a clear cash flow benefit in that case, for the reasons I gave. But I totally get it for your example. It’s a kind of leverage, right? Effectively using your suppliers as a loan facility.

hef19898 4y ago

Cash flow is differwnt from overall profit and loss. Stretchibg payment terms doesn't help you with the latter, it certainly does with the former. Assume you get your money from clients faster than you pay your suppliers, something quite common in retail. One can be profitable and cash positive (best place to be in), cash positive and unprofitable (acceptable, especially for growth-focused businesses), cash negative and profitable (kind of ok-ish assuming some reliable backing by banks to cover any cash constraints) or cash negative and unprofitable (the by default dead category, excluding VC money I have the feelong a lot start and scale ups fall in this category at the moment).

Closi 4y ago

It’s about cash flow - plenty of fundamentally profitable companies go bust because of short-term cash flow issues, so if you can give yourself an extra two months leeway from a financial perspective that can be huge for survival. Another simple way to look at it: If I am buying 10,000 widgets for £80 each and expect to sell them for £100 across the next three months, I either need to have £80,000 sitting in the bank that I then tie-up in phones, or I agree to pay £80,000 in three months (maybe it is then £85,000 due to credit terms) but then I can sell the phones before I buy them. It’s a minor example, but if you imagine you are a growing retailer and employ this strategy you can grow much faster than another retailer who doesn’t (and has to tie their cash up in stock). Above examples are very simplistic because it’s about stock, but same logic can be applied to other purchases - most cash spend a business makes should presumably deliver some sort of value, so paying later allows some of the value to be realised before payment is required. This is why cash flow is king.

doctor_eval 4y ago
Yep this makes sense, thanks. My background is SaaS services where you have long term contracts payable monthly. I don’t think there is a clear cash flow benefit in that case, for the reasons I gave. But I totally get it for your example. It’s a kind of leverage, right? Effectively using your suppliers as a loan facility.