A lot of cash flow management gets focused on your customers. How you can sell more, get paid more quickly and avoid costly bad debts.
On the other side of the coin, the more cash you can retain in your business through the terms you agree with your suppliers, and the longer you can keep hold of it, the healthier your bank balance will be too.
Some skillful negotiation at the beginning of an agreement can make all the difference.
Negotiating the right deal
Here are some things to look out for and negotiate at the beginning of your contract.
Payments in advance
The first thing to understand is if you have to pay anything in advance with your order, or even keep money on account with the supplier. Money paid in advance is a drain on cash flow because you can’t make the sale or benefit from the service until the order is fulfilled.
You should try and negotiate advance payments down as low as possible. (Tip: try and agree that the first payment will only be made when the goods have been received and inspected).
The next thing is to agree how much credit is on offer for the balance of the purchase. Credit is not guaranteed, but 14 -30 days is quite normal in business-to-business transactions and you might be able to negotiate more if your order is seen as being a particularly valuable one.
Lengthening your payment terms will free up cash flow.
There is some obscure terminology used around payment terms, so make sure you know what you’re agreeing to. For example:
- Cash on delivery – essentially, this is no credit. Payment is due when the product or service is delivered – that’s not great for your cash flow as you’ve then got to make the sale and collect the cash from your customer.
- 30, 60, 90 days – payment is due the specified number of days after the invoice date, including weekends and bank holidays.
- Net 30, 60, 90 days – Confusingly, this can either mean the stated number of days after the month end in which the invoice is raised, or it can indicate the availability of an early settlement discount. The inclusion of a phrase like 5/10 would mean that a 5% discount may be netted off if the invoice is settled within 10 days. If in doubt, ask.
…which brings us on quite neatly to the topic of early settlement discounts. Paying early is going to help your suppliers with their own cash flow and they are likely to be willing to incentivise it. If you have the cash to pay early and can negotiate a worthwhile discount for doing so, you will improve your profit margin.
Discounts may also be available for larger orders. If you can shift the stock quickly, a discount on a bulk buy could be a good deal.
Oh yes, the price. How could we forget? Make sure you understand how the prices are set in your contract and when they are reviewed. Finding yourself beholden to your suppliers’ changing pricing because you haven’t got the time to take your business elsewhere could lose you sales or, at best, damage your profits if you decide to absorb the price increases.
Keep in mind that cash tied up in stock is dead money so be aware of minimum order quantities. If they force you to order in more than you really need, you won’t have the cash available to spend on other things.
Try and negotiate minimum order quantities down. This can also help you if you go through a bit of a lean spell and sales drop.
Relationships with suppliers
We can’t end this post without talking about the importance of your relationships with your suppliers. The better your relationships are, the more likely you are to be able to agree mutually beneficial terms and a bit of flexibility every now and then when your business goes through its inevitable ups and downs. Remember too, to respect your fellow business owner. We have a culture of late payments in the UK, which is largely caused by businesses passing their cash flow issues down the line to their suppliers, often with catastrophic effects. Sometimes it is commercially unavoidable, but it is ethically undesirable and should only be used as a last resort. When it happens, maintaining an open and honest dialogue with your supplier is a must.
For more advice on how to manage your cash flow please read our other posts. Subscribe for our free cash flow management app too. CaFE will put all the information you need about the money coming in and due to go out of your business in the palm of your hand.