Dr. Rick Franza, Professor of Management at the Hull College of Business, discusses a different, timely business topic each Monday in this column. This week, he talks about the importance of timely payment to vendors and employees. The interview has been edited for clarity and impact.
ABD: A struggle that small businesses sometimes face is paying their bills on time. Why is it important to make those payments in a timely manner, especially when it involves employees, contractors, and vendors?
Rick: If you don’t pay on time, it sends a message: To employees, it’s, “Am I really that important to them?” and to vendors, it’s “Don’t come to me for rush orders.” If a vendor is always chasing you down for money, you’ll become a low priority to them. You’ll lose the trust of your employees and they’re going to look for somewhere else to work. Eventually, people will say, “To heck with working with your business, it’s not worthwhile.”
ABD: What is usually the problem when a business finds itself in a bind in making payments? Is it negligence?
Rick: It’s not negligence. It’s a two-pronged problem – it’s a cash-flow problem and a problem of having too much on your plate. It’s often because a person is good at what they do, but doesn’t understand how to run a business. They have great ideas, but they lack business sense and that comes back to bite them.
One of the biggest problems small businesses face is when they start growing. It’s a double-edged sword – you want to grow, but you also must build new infrastructure to grow. That’s where entrepreneurs often get killed. They become victims of their own success. As the business takes off, they’re not ready to scale it up.
There’s a book, No Man’s Land by Doug Tatum that talks about this. A blurb on the cover states the problem: “Somewhere between small and big is a place where many companies get lost.”
ABD: I know that in small businesses, the owners/entrepreneurs often get caught up in trying to do too much themselves. Should they consider getting help, or at least advice?
Rick: I recommend that they tap into things like the Small Business Development Center. Or contract with people who offer business services, like Tabitha Hollimon at Outsourcecfo that offer CFO-type services, or business coaches like yourself or Darin Myers at www.tabscra.com. You have to pay for those resources, of course, but they cost less than hiring a full-time person.
ABD: Since small businesses often work with and for other small businesses, sometimes the problem isn’t with you paying your bills, but getting your vendors to pay for work you’ve done. How do you go about making sure those who owe you pay on time?
Rick: It starts with communication. Never let it linger too long. Sometimes, when people don’t hear from you about a late payment, they may think you’re OK with it. At the start of any business relationship, talk about potential issues and then when something arises, let them know what’s going on.
You can also talk to other business people about the companies you’re thinking about going into business with to see if there are potential issues you should be aware of.
People are embarrassed by cash flow problems, but the longer you let things linger, the worse it gets. Anytime you can deal with it proactively, the better the chance you can work it out. Learn to have those conversations upfront – if you don’t, it makes for more difficult conversations later.
ABD: Do you sometimes have to “fire” a client when things aren’t working out?
Rick: If there’s a problem with them paying you, you have to consider the history. If they’ve always paid well and this is an anomaly, then you can have a conversation with them and figure out how to proceed.
But if it’s a client who has a record of never paying on time, then you have to cut them loose because you’re just doing the work for free. People hesitate about losing a client but if you’re losing a client who doesn’t pay, you’re not losing a client.