One of the common challenges in running a business is how to best juggle cashflow and creditors. On the one hand, everyone wants to have a good relationship with their suppliers but, on the other hand, sometimes, your cashflow won’t allow you to pay everything or everybody. How do you successfully manage this?
One method that I can recommend is what I’ve termed the ACOP method. This involves the classification of your creditors into 4 types (in order of priority):
- Critical / Aggressive
- Critical / Passive
- Optional / Aggressive
- Optional / Passive
Importantly, the names of these groups are purposely over-descriptive in order to help in the classification process. You may not have any ‘aggressive’ creditors in the normal sense of the word but, I suspect, you will have an idea of those who might react stronger than others to an unpaid account.
In essence, by classifying each creditor into one of the 4 groups, you will have a starting point from which to prioritise them (and your cashflow). As an example, if you have a creditor that is both critical to your business and also somewhat aggressive, then it’s likely you’ll need to prioritise them in your payment decisions. Conversely, a creditor who could be replaced or who’s dealings are optional and who is also somewhat passive, may be the one who has to wait a little longer when your cashflow is tight.
Undoubtedly, we all do some form of classification when paying creditors but experience tells me it can be linked to factors or concerns that lead to wrong priorities. Getting the classification right can really remove the guess work and make the process much more straightforward. I recommend giving this classification process a try when you are next paying invoices. You might find the order you next choose is different to that in the past.
Article by Jason Sharp