At Tom Vignali CPA, Inc., we are sometimes approached by potential new clients who are experiencing financial difficulties. One of these problems might be that they have fallen behind in making payments to one or more of their vendors (this article does not address delinquencies with a lender). In this article, we would like to discuss some possible causes and solutions to that problem.
The Cause(s) of Delinquent Payables
The delinquency is directly due to a lack of funds necessary to maintain current payment terms. This problem might be due to issues within your control or beyond your control. Although the list of causes could be endless, we have found that there are some basic causes. Here are a few examples:
Collection of A/R has slowed down
Over-purchasing of products / goods
Increased inventory levels
Decrease in sales
Over expenditures (unnecessary purchases)
Too aggressive expansion (staffing, facility, programs)
Unanticipated expenses or cost increases
Crisis (weather, construction, etc.)
Litigation, fines, or penalties
At Tom Vignali CPA, Inc., once we have determined what the cause is, we recommend corrective measures to mitigate and resolve the cause. After all, if the cause continues, the problem will continue.
Two Points of View
The Vendor’s Point of View
It is important to view this issue from two perspectives: yours and the vendor’s. The problem is that you don’t have enough money to pay your vendor in a timely fashion, and your vendor wants to get paid. When one of your customers becomes delinquent on payments to you, it impacts your cash flow and impairs your ability to make payments in a timely fashion. Well, your vendor is most likely experiencing the same issues.
Your Point of View
Your inability to pay might be due to something beyond your control, and you would like some consideration on the part of your vendor(s). It might be due to something you are directly responsible for, have corrected, and you would like some consideration on the part of your vendor(s). You are a valuable customer and purchase a significant amount from the vendor(s) on an annual basis.
Despite whatever your point of view might be, your vendor(s) are still experiencing the same sort of problem that you experience when one of your customers doesn’t pay you in a timely fashion. So, whatever the reason or point of view, the problem remains as “paying” and “getting paid”.
Recommended Tactics
1. Have Open and Transparent Discussions
Once you realize that you will (or have) become delinquent on payments to a vendor(s), initiate an immediate discussion with them to discuss the problem, what you have done to resolve it, and how you propose to become current with your payments again. You will need to address how you will pay down the delinquency, and how you intend to pay for current and future purchases.
Do not disappear from the universe! Offer to take every call from the vendor or their A/P collections staff throughout the process. Nothing angers these people more than getting told that you are out of the office or that the check is in the mail or getting no answer at all!
Needless to say, just because you are open and transparent doesn’t mean that the vendor(s) are in agreement with whatever you propose or will be understanding of your problem. However, transparency goes a long way towards negotiating a successful resolve and keeping your credit lines (ability to continue purchasing from them) in place.
Also, if you are delinquent with more than one vendor, each individual vendor is only concerned about how soon THEY will get paid, despite the fact that you might be delinquent with other vendors, as well. Their primary concern is how they will get paid for the services and products they sold to you.
2. Develop a Payment Plan
This is a must! Any discussion you have with your vendor(s) is useless if you don’t have a plan to propose to them regarding how you intend to resolve the delinquency.
A primary element of any plan is that you must assure the vendor(s) that you will maintain current payment terms for all current and future purchases, and that the level of delinquency will not increase. Many vendor(s) will allow you to continue purchasing under existing terms if frequent payments are made against the delinquency.
You must propose an exact payment plan to resolve the delinquency: time of payment, amounts of payments, etc. If this plan is accepted, any deviation could be disastrous! It is important that the delinquency decrease over time, and that no existing amounts due move from current to delinquent.
One payment tactic that we have used rather successfully is to increase the payment frequency against the delinquent amounts from monthly or bi-monthly to weekly. For example, if the mutual agreement is that you will pay down the delinquency by $1,000 per month, rather than agreeing to send them one check for $1,000 on a specific date, propose that you will send them a check for $250 each and every week. The total payment amount might be the same (with the exception of five-week months), but their A/P department will be receiving payments on a weekly basis, and will be assured on a weekly basis that you are complying with your agreement rather than having to wait for 30 days for each payment. This type of assurance goes a long way towards generating good will. It also puts the cash into their hands much quicker.
3. Determine How Much to Pay
Let’s not kid ourselves: If you are delinquent with one or more vendors, each one of them will want to be paid immediately. If you could pay them, you wouldn’t be in this problem. Each vendor must be assessed on an individual basis. Are they a primary supplier? Are they a current supplier? Could you exist without them? How valuable are they to your business success? It’s not that you don’t owe all of them money, it’s just that one might be more valuable to your continued operation than another, and this must be calculated into how much you dedicate in payments to each. Additionally, sometimes much larger vendors are more receptive to extended payment plans, and sometimes they are not. Your relationship with each vendor will have a significant impact on what you are able to negotiate.
How much you allocate in your payment plan for each vendor is critical and must be individually negotiated, but the total aggregate amount you are dedicating from existing cash flow towards delinquent payables is also critical. One basic rule of thumb that we use is that monthly allocations from monthly cash flow dedicated to delinquent payables should never exceed 10 percent. It is extremely difficult to limit payments to this level, but it allows you to calculate preliminary payment amounts and the time it will take to resolve the delinquency. Also, due to your financial difficulties, it might seem impossible that there is even 10 percent available from cash flow to dedicate towards these payments. At Tom Vignali CPA, Inc., we assist clients with the development of cash flow projections to ascertain what aggregate amounts are capable of being used for negotiations. Of significant concern in these calculations is a review of all costing, pricing, operational expenses, etc. to determine what, if any, cost reductions or income enhancements can be made to allow for the aggregate payment amounts being proposed.
4. Seek Guidance on Documentation Requests
A vendor might require you to provide them with:
Frequent internal financial statements (P&L, Cash Flow, A/P Reports)
An agreement to the payment terms
A promissory note
Or, they might execute a UCC Filing
At Tom Vignali CPA, Inc., we will discuss these types of requests/actions on an individual basis.
Conclusion
Delinquencies with vendors are always difficult to deal with, but not impossible to resolve. We have identified some of the critical elements that must be addressed in order reach a successful resolution to this problem:
Identify the Cause and Correct It
Communicate
Develop a Plan
Negotiate
Fulfill the Agreement
However difficult the process might be, we have found that by addressing these critical elements, a successful resolution is attainable.
If you would like to further discuss this issue or any other accounting issues, don’t hesitate to contact us at Tom Vignali CPA, Inc.
Contact Us:
Thomas W. Vignali CPA Inc.
118 Point Judith Road
Narragansett, RI 02882
T: (401) 415-0798
tom@tomvignalicpa.com
www.tomvignalicpa.com
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