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How to manage payables in a crisis

Last updated: May. 12, 2020 

If you’re in a cash crunch, you may need to work with your suppliers to ensure they still get paid.

It can be tricky to manage payables at the best of times – you may not want to pay suppliers too early, but you don’t want to pay them too late, either – but it’s much more difficult to deal with now, with COVID-19 wreaking havoc on cash flows and supply chains.

You have a stack of invoices that need to get paid soon, but you’re nervous about laying out too much cash at one time. Or perhaps a supplier is asking to get paid faster than usual, and you’re not sure what to do. You also don’t want to burn any bridges by doing the wrong thing – at some point business will pick up again and you’ll need to rely on your suppliers to help you get your products or services out the door again.

So how can you manage payables during this crisis and keep your relationship with your suppliers strong? Here are some ideas.

Figure out your cash flow

Most companies fail over cash flow problems, not lack of profitability, says Robert Biscontri, an assistant professor of accounting and finance at the University of Manitoba. So the first thing to do is to get back to the basics. Run new cash flow projections and revisit your business plan with the current economic environment in mind.

At the same time, Biscontri suggests you run the numbers through a range of scenarios, such as business bouncing back next month, years of rock-bottom revenues and everything in between. Once you have some data, you can identify places to improve your cash flow. That could mean trying to collect money from your clients earlier so that you can pay your suppliers more quickly. “Look to your accounts receivable to help your accounts payable,” he suggests.

Be open with suppliers

“Communicate and negotiate,” is Biscontri’s favourite mantra. If you are in a tough financial spot, go to your suppliers and try and work out new terms. Don’t be afraid to tell your supplier that staff need to get paid first – they’ll hopefully understand – and the pain points you’re experiencing and your ideas for weathering the next few months. It may be hard to reveal that sales have been cut in half and you’re using the federal wage subsidy to stay afloat, but everyone is in the same situation. “Sometimes we have to admit, ‘Hey things aren’t right. It’s OK that things aren’t right,’” he says.

Giovani da Silveira, director of the Canadian Centre for Advanced Supply Chain Management and Logistics at the Haskayne School of Business in Calgary, suggests targeting specific suppliers. “Look to those firms you have a long-term relationship with already, and the firms you know need your business. They’ll be more likely to negotiate,” he says. For instance, if you have plans for a new and ongoing project with that supplier, you might consider asking them for a bulk discount.

Ask for new payment terms

Depending on how tight things are, you could ask your supplier for new payment terms, whether that’s moving a 30-day payment term to 60 or 90 days. If you have a good relationship, and if they are still doing OK financially, then they may be fine with the change.

Another option is to pay something every few weeks instead of a large sum at once. “I always say that 20% of something is better than 100% of nothing,” says Biscontri. If your supplier trusts you, they may be OK with you paying your outstanding amount over 10 months. It may not be the ideal arrangement, but they’ll be happy that something’s coming in, especially today. Be transparent about when you’re sending payments, and the relationship should stay firm.

It may be time to shop around

Some of your suppliers may not be holding up their end of the bargain either, with delayed shipments or quality problems. That might present an opportunity for you to negotiate better terms. However, if other companies aren’t experiencing the same problems, and your supplier isn’t open to working with you – maybe they have cash flow problems themselves and don’t have a plan to fix things – you might need to move on. “Use this problem as an opportunity to identify the points of weakness in your supply chain and try to make sure this won’t happen in the future,” suggests da Silveira. It’s never a good idea to rely on one supplier for all your business needs anyway, and that’s especially true today, so consider diversifying.

Still, the best course of action is to keep your supply chain intact and your partners happy, says Biscontri. If everyone is honest about where they stand financially, there’s no reason you can’t come to an amicable solution that works for everyone.

Contact FBC

If you’d like to learn more about this or other COVID-19 programs for Canadian businesses, please call us at 1-800-265-1002 or email Unlimited consultation related to tax matters is a key benefit of FBC Membership. You can also book an appointment.

Visit our COVID-19 Resource Centre for the latest information, advice and insights for small business owners.