Cash In, Cash Out Whether your company is flush with cash or barely hanging on by a thread, how you manage payables can help unlock its potential.

In January, home product distributor Jeff Schreiber traveled toDallas for a trade show, a rare opportunity to meet with vendors ina deal-making atmosphere. Schreiber, 30, negotiated a deal topurchase $40,000 in ceiling fans from one of the manufacturers.Fortunately, the supplier agreed to give him until July to pay forthe goods. But he also made Schreiber an appealing offer hecouldn't refuse.

The vendor would give him a 3 percent discount for paying by May1, and an extra three-quarter-point reduction for each month hesettled the account before that. While a May payment would yield$1,200 in savings, Schreiber would save another $600 by paying inFebruary. Not only that, the early shipment also gave Schreiber ajump-start on sales before any payment deadline. It was a win-winscenario for Hansen Wholesale, his $3.5 million company inCerritos, California.

When a vendor dangles an attractive financial incentive,Schreiber rarely passes, wracking up $15,000 in early-pay savingsin the past year alone. Says Schreiber, "Your money worksbetter if you take advantage of the discounts."

Do the Math
Schreiber is wise to be so vigilant about cash flow. Knowing how tomaintain a healthy cash flow is essential, yet entrepreneurs oftenoverlook obvious ways to improve their financial position,including how they manage payables. While taking advantage ofdiscounts reduces cash flow, savings go directly to a company'sbottom line. Cash-strapped companies, meanwhile, often don'tbother to negotiate extended payment terms.

Because businesses gain the greatest benefit from paying theinvoice with funds generated by selling units from an order, howthey manage payables plays a critical role in cash-flow management.In the best of worlds, a company can sell an item before it has topay for it, so the payment terms serve as an interest-freeloan.

It's quite common for a supplier to offer payment termsrather than requiring money upfront. A typical term is "2/10,net 30." This means the entire balance is due within 30 daysof the invoice, but the buyer can deduct 2 percent if the bill ispaid 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 theServicesCorps of Retired Executives. "If you have money in thebank, why would you throw away the $20,000?"

Companies with restricted cash flow, on the other hand, need totake as long as they can without incurring late fees or interestcharges to pay bills. Experts advise them to take the extra step ofobtaining liberal payment terms to carry them through slow sellingperiods. 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'sproduct more prominently, maintains Weiss.

Whether asking a vendor for extended payment terms or for anearly-pay discount, entrepreneurs have to assess whether asupplier's demands are realistic. "If I was doing $4,000in purchases a month and the vendor said 'I want you to buy$40,000 worth of product, and I'm going to have [payment] duein three equal installments,' that's not going towork," Weiss insists.

By the same token, it may not be practical for a business toincrease purchase volume as a condition of receiving better terms.Rather than easing cash-flow burdens, it may tie up too muchcapital in stock, creating payment problems. "[Paying late] isnot an advisable way of improving cash flow," Weiss warns. Asupplier may ultimately require cash in advance or limit credit,stifling business growth.

Stand YourGround
Vendor negotiations, even under the best of circumstances, aredaunting. Schreiber, who already had experience brokering vendorcontracts, can see how an aggressive sales agent could beintimidating. His advice: Be prepared to walk away. "As soonas you're afraid to walk away, you lose leverage," hesays.

Before buying a product, Schreiber meets with at least threevendors, asking each the same questions. "I leverage onevendor vs. the other. I say 'I'm working with this vendor,and this is what they're going to give me; why aren't youable to give me this?' They'll often bring up a point thatI'm not getting, and then you try to marry the best ofeverything into a final proposal you send to all of them."

A business owner, Schreiber says, will have more power if he orshe buys large amounts from a small group of vendors. "You canleverage that better than buying from a lot of vendors andspreading it around. You're a bigger fish."

While business owners may think to inquire about discounts forvolume and frequent-customer discounts, they shouldn't stopthere, says Ray Silverstein, founder of the Chicago-based President's ResourceOrganization, a network of business owners. Entrepreneurs mayget a promotional discount, for example, by creating an advertisingplan for the vendor's product, such as featuring it in acatalog. "Your imagination," he says, "is your onlylimitation."

Silverstein also recommends requesting "obsolescencemoney," which allows your company to upgrade to an enhancedproduct at no additional cost, and striking a deal to eliminateyour need to return defective items to vendors. Another option isasking for bulk packaging instead of paying more for individuallywrapped items.

Consignment financing, he says, also helps minimize cash flowgoing out of the business. While the entrepreneur may plan to use acertain number of items over a period of time, their need oftenvaries. Vendors may let companies place a standing order for theentire amount but will hold on to the product until it'srequired, eliminating the need for businesses to carry the cost ofmaintaining inventory.

Co-op advertising is another under-used strategy. It allows theretailer to place an ad partially paid for by the manufacturer inreturn for mentioning the product. A vendor may have a 5 percentco-op advertising program payable on a fifty-fifty basis. In thatarrangement, a $100,000 purchase would earn the company $5,000 inadvertising funds. If the entrepreneur purchased a $1,000advertisement, the vendor would contribute 50 percent, or $500,from the account. "It increases cash flow with your vendor buthas nothing to do with invoices," Weiss says. "These aremajor differentials in your profitability if you're doing realbusiness."

Crystal Detamore-Rodman is a Charlottesville, Virginia,writer who covers the small-business finance market.