In January, home product distributor Jeff Schreiber traveled to
Dallas for a trade show, a rare opportunity to meet with vendors in
a deal-making atmosphere. Schreiber, 30, negotiated a deal to
purchase $40,000 in ceiling fans from one of the manufacturers.
Fortunately, the supplier agreed to give him until July to pay for
the goods. But he also made Schreiber an appealing offer he
couldn't refuse.
The vendor would give him a 3 percent discount for paying by May
1, and an extra three-quarter-point reduction for each month he
settled the account before that. While a May payment would yield
$1,200 in savings, Schreiber would save another $600 by paying in
February. Not only that, the early shipment also gave Schreiber a
jump-start on sales before any payment deadline. It was a win-win
scenario for Hansen Wholesale, his $3.5 million company in
Cerritos, California.
When a vendor dangles an attractive financial incentive,
Schreiber rarely passes, wracking up $15,000 in early-pay savings
in the past year alone. Says Schreiber, "Your money works
better if you take advantage of the discounts."
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Do the Math
Schreiber is wise to be so vigilant about cash flow. Knowing how to
maintain a healthy cash flow is essential, yet entrepreneurs often
overlook obvious ways to improve their financial position,
including how they manage payables. While taking advantage of
discounts reduces cash flow, savings go directly to a company's
bottom line. Cash-strapped companies, meanwhile, often don't
bother to negotiate extended payment terms.
Because businesses gain the greatest benefit from paying the
invoice with funds generated by selling units from an order, how
they manage payables plays a critical role in cash-flow management.
In the best of worlds, a company can sell an item before it has to
pay for it, so the payment terms serve as an interest-free
loan.
It's quite common for a supplier to offer payment terms
rather than requiring money upfront. A typical term is "2/10,
net 30." This means the entire balance is due within 30 days
of the invoice, but the buyer can deduct 2 percent if the bill is
paid within 10 days of the invoice date.
"For a company doing a million dollars a year in purchases,
that translates into $20,000 that flows to its bottom line,"
says Marty Weiss, counselor at the San Diego chapter of the
Services
Corps of Retired Executives. "If you have money in the
bank, why would you throw away the $20,000?"
Companies with restricted cash flow, on the other hand, need to
take as long as they can without incurring late fees or interest
charges to pay bills. Experts advise them to take the extra step of
obtaining liberal payment terms to carry them through slow selling
periods. Because delayed payment terms are costly to the supplier,
business owners should be prepared to offer something in return,
such as buying a certain amount or displaying the vendor's
product more prominently, maintains Weiss.
Whether asking a vendor for extended payment terms or for an
early-pay discount, entrepreneurs have to assess whether a
supplier's demands are realistic. "If I was doing $4,000
in purchases a month and the vendor said 'I want you to buy
$40,000 worth of product, and I'm going to have [payment] due
in three equal installments,' that's not going to
work," Weiss insists.
By the same token, it may not be practical for a business to
increase purchase volume as a condition of receiving better terms.
Rather than easing cash-flow burdens, it may tie up too much
capital in stock, creating payment problems. "[Paying late] is
not an advisable way of improving cash flow," Weiss warns. A
supplier may ultimately require cash in advance or limit credit,
stifling business growth.
Stand Your
Ground
Vendor negotiations, even under the best of circumstances, are
daunting. Schreiber, who already had experience brokering vendor
contracts, can see how an aggressive sales agent could be
intimidating. His advice: Be prepared to walk away. "As soon
as you're afraid to walk away, you lose leverage," he
says.
Before buying a product, Schreiber meets with at least three
vendors, asking each the same questions. "I leverage one
vendor vs. the other. I say 'I'm working with this vendor,
and this is what they're going to give me; why aren't you
able to give me this?' They'll often bring up a point that
I'm not getting, and then you try to marry the best of
everything into a final proposal you send to all of them."
A business owner, Schreiber says, will have more power if he or
she buys large amounts from a small group of vendors. "You can
leverage that better than buying from a lot of vendors and
spreading it around. You're a bigger fish."
While business owners may think to inquire about discounts for
volume and frequent-customer discounts, they shouldn't stop
there, says Ray Silverstein, founder of the Chicago-based President's Resource
Organization, a network of business owners. Entrepreneurs may
get a promotional discount, for example, by creating an advertising
plan for the vendor's product, such as featuring it in a
catalog. "Your imagination," he says, "is your only
limitation."
Silverstein also recommends requesting "obsolescence
money," which allows your company to upgrade to an enhanced
product at no additional cost, and striking a deal to eliminate
your need to return defective items to vendors. Another option is
asking for bulk packaging instead of paying more for individually
wrapped items.
Consignment financing, he says, also helps minimize cash flow
going out of the business. While the entrepreneur may plan to use a
certain number of items over a period of time, their need often
varies. Vendors may let companies place a standing order for the
entire amount but will hold on to the product until it's
required, eliminating the need for businesses to carry the cost of
maintaining inventory.
Co-op advertising is another under-used strategy. It allows the
retailer to place an ad partially paid for by the manufacturer in
return for mentioning the product. A vendor may have a 5 percent
co-op advertising program payable on a fifty-fifty basis. In that
arrangement, a $100,000 purchase would earn the company $5,000 in
advertising funds. If the entrepreneur purchased a $1,000
advertisement, the vendor would contribute 50 percent, or $500,
from the account. "It increases cash flow with your vendor but
has nothing to do with invoices," Weiss says. "These are
major differentials in your profitability if you're doing real
business."
Crystal Detamore-Rodman is a Charlottesville, Virginia,
writer who covers the small-business finance market.