Whether you’re selling toy cars or sports cars, java beans or Java software, office supplies or office machines, Band-Aids or banner ads – cozying up with vendors can create opportunities for both bottom-line and top-line growth. What exactly do we mean by “cozy”? It’s all about getting in tune with — and in the good graces of — your key vendors to erode any unnecessary limiting factors and to find ways to spur growth.
We recognize that every business, especially retail, shares a dilemma: optimizing payables over receivables. We’ll share a few concepts that can help you achieve a better balance.
We’ll also show you how a more cozy relationship with your vendors can lead to better industry knowledge, the best inventory mix and the best operational equipment and solutions to keep you on the cutting edge.
IN THIS STEP, WE’LL DISCUSS THESE THREE CONCEPTS:
- Advantageous Payment Terms
- Volume Discounts
- Know Upcoming Products
Advantageous Payment Terms
Stretching out payments
You hate not getting paid on time, right? The challenge is to maintain a healthy inventory supply, which creates revenue-generating opportunities, while you’re operating in a typical environment where inbound revenues are slow. This is a cash-flow challenge and can significantly hamper your ability to run your business strategically.
The trick is to work closely with vendors to negotiate mutually agreeable payment terms.
If they want your business badly enough, they may agree to ease up on the timing of your payments. For example, their current terms might be pay-on-delivery; they might be the typical net-30. But with the right arm-twisting — promises to focus on them for your buying, or other incentives — you may well be able to establish such extended payment terms as net-45 or 60. If their cash-flow constraints aren’t as sensitive as yours, it can be done!
What’s this mean to you? It means you can use revenue from operations, rather than more expensive forms of financing, and this means a better bottom line.
Shortening payment timeframes
Alternately, you might want to do the opposite – pay your vendors early. Does this make sense? Only if they give you a financial incentive. If cash-flow sensitivity is not too bad with your business, you might be able to arrange a percentage discount on payables. The same applies to office equipment and services.
Here’s how it works: Instead of paying on the traditional net 30-day terms, ask for a 2 percent discount if you pay within 10 days. For vendors who are cash-flow vulnerable, it may be very appealing. For you, it means a slight discount on every order. And every couple of percentage points you save here add to your profit margins.
Using basic math, let’s say your business has gross profit margins of 20 percent, and you take advantage of the “Net 10 / 2%” payment terms on a consistent basis. This would result in a 2 percent discount on inventory costs, and would increase your profit margin from 20 percent to 22 percent. That’s a 10 percent improvement in total profit margin, and that’s real money you keep for very little effort.
If you’re in retail, this recommendation is particularly worth considering: Transfer inventory risk to your vendors almost completely. It can be pulled off either by encouraging consignment terms, where you never buy the product, but simply offer it and earn a commission on sales – or by implementing a “guaranteed sale” policy, where vendors must buy back any product that doesn’t sell. This is extreme, but often newer vendors will go along in an effort to prove themselves and their unproven products. This applies whether you’re an online retailer or a traditional brick-and-mortar business.