Supplier payment terms float: 37 days of free cash.
The supplier payment terms float is the cash you hold between customer payment and supplier bills. In the chapter's example, that window lasts thirty-seven days. Because it repeats with every batch, it grows with your sales while the next batch keeps selling.
How the supplier payment terms float works.
A business sells a batch on the first of March and gets paid on the fifteenth. However, the supplier invoiced on the twentieth of February, on sixty-day terms. So that bill only leaves the account on the twenty-first of April. As a result, the owner holds thirty-seven days of earned money against an unpaid bill.
Why the gap grows with your sales.
Then run the same batch again in April, May and June. The gap does not close, because it moves forward with you. Also, it gets larger every time your sales do. In short, this is using supplier credit to grow, without a loan and without giving anyone a share.
The closest thing to free money.
The chapter treats this as the nearest thing to free money from payment terms in ordinary commerce. Almost nobody outside accounting even knows its name. Still, the supplier payment terms float only holds while the next batch sells. So treat it as timing, not as a gift.
Map your supplier payment terms float tonight.
Pick one recent batch and write down the date your customer paid you.
Then find the supplier invoice date and terms, and count the days between both payments.
From the book.
The gap does not close. It moves forward with you, and it gets larger every time your sales do, and what you are looking at is a pool of money that grows as the business grows and never has to be repaid so long as the next batch sells.
I Want to Start a Business but I Don't Have Money, chapter 6: The float: how to get paid before you pay
Questions about supplier payment terms float.
How long can a supplier payment terms float last?
In the chapter's example, it lasts thirty-seven days. Customers paid on the fifteenth of March, and the sixty-day supplier bill fell due on the twenty-first of April.
Is the float borrowed money?
No. The cash is money the business has already earned, so it is not borrowed and nobody gains a share of the company.
Does the gap ever close?
Not while sales keep coming. It moves forward with each batch and grows as sales grow, as long as the next batch sells.
Read the whole chapter.
This lesson covers one section of chapter 6, “The float: how to get paid before you pay”. The book goes further, with the full evidence, the stories and every exercise.
Lessons in this chapter.
- 01 Supplier payment terms float: 37 days of free cash.
- 02 Cash conversion cycle formula: three hands on a clock.
- 03 Negative cash cycle small business: the Blanquident way.
- 04 Rathwood collapse Ireland: a profitable firm undone.
- 05 Can small business get net 90 terms: the honest answer.
- 06 Calculate cash conversion cycle: your three numbers.
- 07 Risks of spending customer deposits: six float traps.