Negotiating Better Payment Terms With Your Suppliers
by Larry Slusser on December 4th, 2007
Cash flow is king, and hanging onto the money that flows through your business as long as you can is not just good business practice, it is essential to maintaining and improving your cash flow, which will in turn improve the profitability of your company. Consider that the United States government keeps billions and billions of dollars of our money and makes interest off of it until they are required to pay it back in the form of a tax refund each year. Many Fortune 500 companies spend millions of dollars on systems and processes to maximize cash flow and lower taxes.
One sure way to improve cash flow and increase available cash to your business is to maximize your accounts payable system. You don’t want to pay finance charges or late fees, and bills are due when they are due; but you have the power to influence just when exactly those bills are due.
Say for example you owe a supplier $10,000 in the next 30 days. If you were able to negotiate that out to 60 days you could put that $10,000 to work in your business, buy inventory and sell it within that 30 days. If your business runs 15% gross profit, you could make an extra $1500 instead of paying the money to the supplier.
So why should a supplier allow you more than 30 or 40 days to pay your bill in full? There are a number of reasons for a supplier to do this. To convince them, you need to work on your sales skills.
WIIFM – What’s In It For Me? This is the basic question you have to answer for any supplier if you want them to cut you a break on your account terms. As you work through the following points to consider, make sure it all comes back to WIIFM!
Competition – Chances are, there are other suppliers who are interested in obtaining your account, so call them up and see what they have to offer. You don’t want to sacrifice quality or reliability to save a few bucks, but if things are comparable and one company offers better terms, pencil out the savings.
Exclusivity – If you currently split your orders between two vendors, talk with your preferred provider and offer them all of the business for better accounts payable terms. If they refuse, talk with the other vendor. Remind them you aren’t asking for a price decrease, just a little more time to pay them off. If you have been a consistent, on-time payer of your bill the chances are they will consider it. Remember though: even if you are exclusive you have to have a back up plan!
Price Increase? – Are you crazy? If you calculate that you can make an additional $1500 on your money by keeping it for an extra 30 days, then perhaps you allow a slight price increase to offset asking for a 60 day payable account. Your supplier will see that you’re working hard to be a fair partner, and you are. In return, you are allowing yourself to make a little more money which is why you are in business.
Fringe Benefits – Even if you are unable to secure extended terms on your business credit, don’t be afraid to explore other alternatives. Suppliers offer rebates from time to time, special purchase rates or other incentives, and sometimes will help you with marketing materials or advertising.
The bottom line with all of these ideas is you have to ask. You are the customer – your supplier doesn’t have all the cards, and don’t let them think that they do. If you pay your bills on time and are running a solid business, you are in demand, and have the right to ask for some help.
Let your supplier work with you to come up with some different alternatives if they are unable to meet your request for a longer payment term. Don’t be afraid to let them squirm a bit. You can still be nice, there is no reason to be nasty about anything. Just be matter of fact and let them know you need a partner who you can count on for a mutually beneficial relationship moving forward.