Costs
Part of How to open vendor accounts without giving away free information
Vendor accounts mistakes to fix once the account is open
Vendor accounts mistakes after opening: declined discounts, paying early, buying to be seen, unreconciled statements, disputed invoice lines and one supplier.
Vendor accounts mistakes often involve small, repeated amounts, which makes them easy to overlook. Once the account is open, the losses come from how you pay it, and every one of them is avoidable with a monthly habit rather than a clever strategy.
What to take away
- The expensive mistakes are about pricing, not about reporting.
- The mistake that wastes years is opening accounts with suppliers you have no reason to buy from.
- A supplier relationship and a credit relationship are the same relationship here, and people manage only one of them.
The discount you decline every month
An early-payment discount declined every month is a recurring cost that never appears as a cost anywhere in the accounts. Nobody sends an invoice for it, so it has to be worked out deliberately.
Take the wording on the invoice. A common one is 2/10 net 30: 2 percent off if paid within 10 days, otherwise the full amount within 30. Use the actual discount and the gap between the discount deadline and the net due date. Then follow four steps:
- Divide the discount dollars by the discounted invoice amount, the sum you actually pay, not the invoice total.
- Count how many discount-to-net payment intervals fit in a year.
- Scale the rate from step one by that count to get the annualized cost.
- Compare the result with your alternative use of cash and any borrowing cost.
Once the number exists, taking or declining the discount becomes a decision. The FDIC's Money Smart for Small Business includes a Managing Cash Flow module that treats cash flow management as an essential competency of business ownership.
Paying early when no discount is on offer
Paying early with no discount attached is a separate error, and the record does not reward it. It costs you cash for nothing.
A related habit is as plain. Paying an invoice two weeks before it
Pay on the date
Paying early
- Discount
- None attached
- Supplier benefit
- Two weeks free
- Your record
- No effect
Paying on date
- Discount
- None attached
- Supplier benefit
- None
- Your record
- On-time mark
Pay on the date. Not before, not after.
Buying goods only to be seen
Buying to generate activity costs the full price of the goods, and the record it produces is worth far less than that. This is a spending mistake first and a credit mistake second.
An account opened with a supplier whose goods you do not need, in order to
Buying to build a file
Do you need the goods?
Route existing purchases
Full price for nothing
Route what you already buy through suppliers that report, and do not add purchasing in order to be seen. What counts as a usable record is covered in tradelines.
Statements nobody reconciles
Trade accounts accumulate credits, returns, partial deliveries and disputed lines. An unreconciled account eventually produces a late mark on something you believed was settled, and the late mark is the part that reaches a bureau.
Reconcile monthly. It takes minutes and it is the cheapest insurance on the list. The route from a supplier's ledger to a file is set out in how tradelines report, and Dun & Bradstreet, Experian and Equifax each hold their own copy of the damage, as credit bureaus explains.
Treating a query as a payment holiday
Withholding an entire invoice because one line is disputed converts a disagreement into a delinquency. Pay the undisputed part, in full, on the date, and pursue the disputed line separately in writing.
If a late mark has already reached a file incorrectly, that is the route in business credit disputes, and the documents to gather start with the invoices and statements you reconciled.
For the legal boundary, the FTC's Credit Reporting guidance says that businesses that report information about consumers to consumer reporting agencies have legal obligations under the Fair Credit Reporting Act's (FCRA) Furnisher Rule. Do not use that consumer-reporting guidance as a blanket claim about how commercial trade terms must be presented.
One supplier holding all the terms
Trade terms are usually granted and reviewed at the supplier's discretion. A business whose entire working capital is one supplier's goodwill has a single point of failure it never chose.
Two suppliers with terms, or one plus a facility you rarely draw, converts a crisis into an inconvenience. The facility option is compared in the credit foundations comparison.
The leaks side by side
| Mistake | What it costs | The fix |
|---|---|---|
| Declining a discount every month | A recurring cost nobody invoices | Annualize it and decide on purpose |
| Paying early with no discount | Free use of your cash for the supplier | Pay on the due date |
| Buying to be seen | Full price of goods you did not need | Route existing purchases only |
| Skipping reconciliation | A late mark on a settled invoice | Reconcile monthly |
| Withholding a whole invoice | A dispute turned into a delinquency | Pay the undisputed part |
Every entry is an instance of the same thing: treating a supplier account as either purely commercial or purely credit-related, when it is both at once. The purchasing decision, the payment timing and the credit record are one decision with three consequences.
Common questions
What if I cannot fund the early-payment discount?
Then take the float and stop feeling bad about it. The calculation tells you what the choice costs; it does not tell you to make a payment you cannot make.
Should I ask for longer terms or a discount?
Ask which is available, since suppliers differ on which they will move. Longer terms help cash timing, a discount helps margin, and you can usually only have one.
What do I do when only one line on an invoice is wrong?
Pay the undisputed part, in full, on the date, and raise the disputed line separately in writing.
