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Question: I am a small business owner. We have a massive amount of capital
tied up in overdue accounts receivable. My accumulating experience is that it is now common practice for large companies and municipalities to manage cash flow by delaying payments to vendors. This puts an enormous strain on a small company - any business advisor will agree that cash flow is the most critical item in the life of a small company. Business growth requires the reinvestment of profits into new products and services. More and more, growth in the small-business sector is constrained by earned income that is not going into business growth but rather into funding receivables that are extending out 60, 90 and even 120 days. In my own experience, it is large companies and public entities that are responsible for withholding the majority of the funds. To a large extent, they do it simply because they can. They have opted to improve their bottom line by taking (not negotiating) extended payment terms. I am extremely troubled by this trend and wonder what your thoughts are.

Answer: At the outset, let me observe that the practice you outline in your question sounds like smart business. Think about it. By extending payment terms to vendors, companies are able to favorably impact their bottom lines in the short term. So, viewed solely through the lens of a company’s economic
self-interest, practicing extended payment terms makes a lot of sense.

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About the Author

Daniel A. Schroeder, Ph.D. is president of Brookfield based Organization Development Consultants Inc. (www.OD-Consultants.com) He can be reached at 262-827-1901 or Dan.Schroeder@OD-Consultants.com.. Read More »

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