One way you can preserve positive cash flow is to negotiate effectively with vendors for favorable payment terms. If suppliers agree to take smaller or no advance payments, stretch out payment periods or grant discounts, you can hang onto cash to pay salaries, build inventory, reduce borrowing or reinvest in the business.
“Number one, by negotiating with suppliers you can get better prices which means lower costs," says Gary Huang, president of 80/20 Sourcing, a supplier negotiation manager based in Shanghai.
“Number two," Huang continues, "by negotiating payment terms you can pay your suppliers later so this will free up your cash flow for other purposes."
How to Negotiate for Positive Cash Flow
The first step in dealing effectively with suppliers is knowing what the business needs from the negotiation.
As you build a better relationship and better trust with your supplier, you can negotiate better terms such as net 30 or net 60, meaning you don't have to pay until after the shipment ships.
—Gary Huang, president, 80/20 Sourcing
“What is your goal?" Huang asks. “Are you looking to increase your cash flow? Or decrease costs?"
Figuring out these answers will guide negotiators to pursue the terms that help their business the most, agrees Harry Hough. (Hough is CEO and president of the American Purchasing Society, a professional association of buyers and purchasing managers based in Aurora, Illinois.
“If a company has plenty of cash, then maybe they want the discount," says Hough. “If they are struggling with cash, they want longer payment terms."
Hough suggests negotiators ask the business's chief financial officer or controller about the firm's cash position to make sure they're seeking what the company needs.
Huang advises preparing a checklist of desired terms to guide negotiations.
“Sometimes people get emotional when negotiating," Huang says. “Having that checklist will help keep the negotiation be strictly by the numbers rather than getting distracted by emotions."
Common Term Scenarios
Typical payment terms when dealing with domestic suppliers call for full payment of the invoice within 30 days of shipment date, according to Hough. Net 30, as it's often abbreviated, may be modified by extending payment terms to net 45 or net 60.
Sometimes sellers want all or part of the money up front.
“A company may want advance payment or payment on delivery if they feel the company is not very sound financially," Hough says. “But if your company is...doing fairly well, you certainly ought to be able to get net 30 or better."
Sellers may also offer a choice between a 1 percent discount for payment within 10 days or full price if paid within 30 days. Turning down this option, often abbreviated as 1 percent 10 net 30, is equivalent to paying approximately an extra 18 percent when annualized interest is accounted for. Firms with a credit line or other financing with a lower interest rate may pick 1 percent 10/30 to save money.
For U.S. companies ordering from China, another common scenario, terms vary depending on the buyer's name recognition and the length and extent of the relationship between buyer and seller, Huang says. Initial orders of product samples may require 100 percent upfront payment.
Later, larger volume orders may be negotiated to 30 percent upfront and 70 percent on inspection, or 50 percent in advance and the balance after inspection, Huang says.
“As you build a better relationship and better trust with your supplier, you can negotiate better terms such as net 30 or net 60, meaning you don't have to pay until after the shipment ships," he says.
Depending on the business needs, negotiators may try to achieve other goals. Warranties and indemnities, contract length and termination rights are also potentially valuable considerations when negotiating with suppliers.
It's important when negotiating to maintain respect for the other side, Huang stresses.
“Obviously, you have to be courteous," he says. “You're not going to get angry and call them names."
Ideally, buyers and purchasing agents trying to protect their own positive cash flow will also be aware of the seller's limits and constraints and not demand unrealistic concessions. In China, for instance, costs for labor, materials and environmental compliance are all rising, Huang says,
“As you try to negotiate, they may have their backs up against the wall," Huang says. “So you have to do your homework and understand their situation."
Modern Negotiation Practices
Today, getting information about suppliers online is easier than ever. That increase in transparency has been especially important for businesses that source globally.
“If you were to source products from China 20 years ago, it was a lot more of a black box back than it is now," Huang says.
Purchasers and buyers can also learn best practices online from informational websites and professional educational and certification organizations.
“With these types of tools you can get educated a lot more easily now," Huang says. “Transparency helps. And knowledge is power."
One downside to conducting business online is that, while the web is a good place to obtain information, businesses are unable to negotiate better terms and prices when purchasing from a website, Hough notes.
“Too many small companies are using the internet to place their orders," Hough says. “They go in and look at a site and place orders. There's no opportunity to relate to a salesperson. It's all one-sided. You just accept the terms and conditions."
Hough urges businesses to look for the best online deals but to also get in touch with salespeople representing suppliers. Then use personal relationships and market knowledge to negotiate effectively for positive cash flow.
“You can shop around and get quotes from various suppliers," Hough says. “There's usually competition."
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