We’ll admit that its more pleasing to collect payments rather than make them, but you can organize your business to optimize how you make payments so that you minimize their impact. There are two ways you can optimize your payments – when you pay them and how you pay them.
Timing Your Payments
A good rule of thumb for timing your payments to minimize impact to your cash flow is this: Delay payments to vendors and suppliers until they are due, unless you can receive a discount for early vendor payment.
Many suppliers offer terms like 2/10 net 30, which means you get a two percent discount if you pay the bill within 10 days, and that in any event you have to cough up the money within 30 days. A two percent discount might not seem like much, but don’t forget that you earn it by accelerating a payment by only 20 days. That works out to a colossal annual percentage rate (APR) of 36.7 percent, which means you can cut your vendor cash outflow by more than one-third simply by taking advantage of this discount. Where else are you going to make a return like that?
Payment Methods – Business Checking Accounts
You set up a business checking account, or at least you should have, when you launched your business. There are three ways to pay from your checking account, and they each work best for different situations:
- Paper checks: You can write checks manually if the volume is small, but let’s assume you are running your business using some sort of software support, such as QuickBooks or an accounting system with accounts payable (A/P). In these types of programs, you set up all your payee classes, such as vendors, employees, customer refunds, tax payments and so forth. The system will prompt you to write checks when due, but more importantly, it will print the checks on your local printer. You’re too busy to write checks by hand, so printing them is a must. If you are a larger company, you might use a bookkeeper who will perform this function for you. You can also have the system print and mail checks to your payees from the cloud, so that you never have to physically deal with paper checks. QuickBooks supports regular and one-off auto payments this way.
- Debit card: You might use a debit card when making certain types of purchases, such as office supplies, business travel and entertainment, or even tax payments. The card is handy for both online and in-person payments, and there is usually no fee for using it. The only warning is to make sure your checking account doesn’t become overdrawn, causing the debit transaction to fail and even cost you penalty fees. (The same precaution applies to checks you write). Debit cards can be linked to electronic wallets, so that you can make a debit payment from your smartphone without having to whip out the plastic card.
- ACH electronic payments: You can authorize automated clearing house (ACH) electronic payments from your checking account, either on an individual basis or by setting up an auto-payment schedule with a payee. The latter is appropriate for monthly expenses such as rent, insurance and so forth. It’s also regularly used to pay employees electronically. On the payment date, the money is wired from your checking account to that of your payee’s. No checks are involved. You can set up ACH payments to push them out at your discretion, or to have recurring payees pull them from your checking account.
Other Payment Methods
Although you’ll handle most of your major business payments with your checking account, you can also optimize your other payment methods to make sure you’re using your money wisely.
- Cash: Stay away from cash for everything except petty purchases. It’s a hassle to account for and creates problems when doing your taxes since you have to provide evidence for payment of your deductible expenses.
- Credit card: A business credit card is useful, especially if money is tight and you have to spread out payments. Be aware that interest rates can be high, and that credit cards aren’t appropriate for some types of payees, such as employees.
- Loans and lines of credit: When you need extra money, a loan or line of credit makes a lot of sense. One advantage of a commercial loan from IOU Financial is that you repay the loan in small daily installments via automatic ACH payments. Not only is this convenient, it means you don’t have to contend with large monthly payments.
If you’d like to learn more about making payments and other basic aspects of running a business, download the e-book “Cold Hard Truth on Small Businesses and Money,” written by Kevin O’Leary, star of ABC’s Shark Tank. There is no one better to answer questions about your small business payments than the small business expert himself!