Who wouldn’t want to get something today without having to pay for it until tomorrow? Float is a convenient way to get goods and services now and pay later, whether that later is within 30 days or there is a longer grace period. This can be very attractive to a company looking to increase their cash flow.
The downside of this practice are the penalties and interest that can come from waiting too long to pay off debt. Also, the process of scheduling payments at random times during the month, cutting checks, and managing invoices often is the hidden cost of float. While you may be able to pay vendors later, you’ll eat up valuable employee time trying to manage lag time before payment is due. And if you are sent more than one invoice noting the payment due, it is far too easy to accidentally double pay.
The other option is to pay now. There are definite advantages to avoiding taking on debt. You may be able to negotiate discounts with vendors if bills are always paid on time or before they’re due. Paying on time can also cut down on employee hours spent managing payments and avoiding late fees. While it may mean parting with funds before you have to, paying now can put you in a good position to avoid accruing additional expenses. If you feel divided about what to do, set thresholds and pay amounts under, for example, $2,000 while floating anything above that until the due date. You will reduce the number of held payments while getting the benefit of the float.
Both paying now and floating are valid ways to handle expenses and each has advantages and disadvantages. Ultimately, the right decision for you depends upon your company’s cash flow situation.