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Managing Vendor Payments with Limited Liquidity

By: Glenn Sniezek

Managing payments to vendors when a company has limited liquidity can be a significant challenge as there is a need to preserve cash, yet vendors need to be paid for their services. While it may seem like an impossible task, there are several actions that can be taken to preserve cash while making enough payments to keep vendors providing services.

The first step is to analyze your cash flows by developing a cash flow forecast to identify the amount of cash you have available to pay vendors on a weekly basis. While most companies do a 13-week cash flow forecast, it’s important to focus on the next 2-4 weeks. This allows for the establishment of a weekly budget for vendor payments.

The next step is to review your vendor list and accounts payable aging to prioritize the vendors based on their importance to the company’s operations (i.e., critical vs. non-critical). The prioritization should be determined based on input from all areas and levels of the organization. Set up periodic meetings (at least weekly) with management of the various business functions (i.e., operations, purchasing, accounts payable, etc.) to assess the vendor prioritization and determine payments to be made to vendors each week.

In most instances, vendors will not be able to be paid in full, so coming up with a payment plan for each critical vendor and sticking to the payment plan is essential to maintaining credibility with the vendors so that they will continue to provide services to the company. This process will allow payments to as many vendors as possible, while staying within budget.

Constant communication is also critical to manage vendor expectations and to keep them informed of the status of payments and the state of the company. Informed vendors are much more likely to continue services than ones that are left in the dark.

For non-critical vendors, payments will need to be delayed in order to preserve cash until liquidity improves. The use of their services should be limited as much as possible. By taking these actions, a company can successfully preserve cash while still paying its vendors.