"Even if you can afford to buy your paperclips with cash—don't." web article offering financial advice to start-up businesses.
Probably one of the most highly practiced forms of cash on delivery today in the US is pizza delivery. With about 65,000 pizza restaurants in the US we can guesstimate that the number of pizza deliveries per day will easily run into millions. Some people do pay over the phone in advance, before their pizza is delivered, but most still present the delivery person with cash or check and, hopefully, a suitable tip. Therefore, if you are in the pizza delivery business, you don't have to worry about credit sales.
On the other hand, if you are selling to a business, they will expect you to provide trade credit. Net 30 is standard in many businesses, with a discount offered for earlier payment. An example credit term is 2/10 Net 30. This is shorthand for 2% cash discount if paid within 10 days, otherwise due in 30 days. You will be able to negotiate those terms, but it is unlikely that you can get your business customers to pay cash on delivery. Unless, of course, you are selling something that is hard to get or in short supply or you are providing an exclusive service.
In order to offset this cash flow problem, at least partially, it makes smart business sense to negotiate favorable credit terms with all your vendors. Many suppliers may require you to pay for initial orders by cash, check or credit card until your business has been deemed credit worthy. Once you have established that you can pay your bills on time, it is possible to negotiate trade credit terms with your suppliers. This is the rationale for the above advice about even buying paper clips on credit. The ready availability of free and flexible trade credit is one source of funding for most businesses in the US. Trade credit is easy to get because, if one vendor doesn't provide credit, you can always find another one that will. It is free because interest is not charged. It is flexible because, even with contracted payment terms, some businesses don't seem to pay promptly as committed.
Of course, there is a downside to not paying on time. If you do not pay on time, some vendors may withdraw credit terms offered to you. That will be counter-productive. Also, many vendors report payment data to business credit rating services. Your business credit rating will get dinged, making it difficult for you to get credit terms with quality vendors.
You are going to have a ton of transactions that you need to keep track of as well as follow up and take action in a timely manner. In order to play this game of selling on credit and buying on credit well, you need systems that can keep track of both payments due to you as well as payments owed by you and remind you so that you can take the necessary actions in a timely manner. In short, you need GnuCash.
In this chapter we shall learn about:
- Accounts Receivable: How to create invoices for credit sales, create reports of payments due.
- How to set the starting Invoice Number.
- Processing payments when we receive them.
- Accounts Payable: How to keep track of bills for credit purchases, get reminders for bills due, and make payments.
So let's get more familiar with how to make this cash flow a savvy part of running a business on the right track.