The Cash Flow Conundrum: People & Companies

As every business owner knows, cash flow is the lifeblood of any business. It affects every aspect of the business, including payroll and payroll taxes, vendor payments, operating expenses, inventory and equipment acquisition, and capital improvements.

The issue of cash flow, largely attributable to the payment of a company’s invoices, relates to the timing of receipts. There is an expectation when a company issues an invoice with terms, say net 30 days, that the customer will pay within the stated terms. Unfortunately, in too many instances, such is not the case. Delayed payment of invoices, across many industries, is highly prevalent and clearly has a negative impact on the company issuing the invoice. In the absence of predictable cash flow, important and sometimes critical decisions and actions are deferred. Missing a payroll date, not making timely payroll tax payments or delaying vendor payments all impact business relationships.

When you view this scenario more broadly, and seek to understand the underpinnings, the conclusion is simple — for the most part all companies have the same issues. Be it your customers or your vendors, they all grapple with the same problems. Given a variety of issues affecting their businesses and the perceptions of their owners, the tendency is to hold onto cash as long as possible. These issues include systemic challenges in their industry, uncertainty as to the economic direction of the economy, recently enacted tariffs that can impact companies importing or exporting overseas, as well as others. I’ve seen small and medium sized businesses that deal with large corporate customers have another problem. Often the large customers, knowing that the company is heavily reliant on their business, will increase, sometimes dramatically, the length of their payment terms to 90 or 120 days. This is often a “take it or leave it” situation. Clearly, waiting for 3 to 4 months to receive payment puts an undue burden on a company trying to operate their business in a timely manner.