For businesses that are inventory-supported, such as retail, resale, or manufacturing businesses, strategic vendor contracts can greatly enhance your profitability and cash flow.
For some companies, vendor contracts are a set-it-and-forget-it portion of the business. However, this can often lead to overpaying for materials or stymied growth due to having capital unnecessarily tied up in inventory.
Negotiating More Strategic Vendor Contracts
There are inherent cash flow challenges that come with having an inventory-supported business. In almost all cases, you’re required to pay for the inventory before you receive payment from your customers—after all, you can’t sell what you don’t have. This means increased financial risk since capital is tied up in this inventory until you receive revenues from it.
Below are some strategies for better managing vendor contracts to offset this financial risk and improve cash flow.
Extend the Number of Days to Pay
For many inventory and manufacturing-based businesses, capital is regularly tied up in materials and inventory. However, this increases the amount of financial risk a company holds while also decreasing working capital that could otherwise be used to grow the company. This risk can be offset with more strategic billing cycles.
Many vendors, especially those with whom you have great relationships, will be willing to extend the number of days to pay on your contract. This helps shorten the amount of time between paying for inventory and receiving payment from customers. Sometimes, you may even be able to extend payment terms long enough that you can receive payment before your inventory bill is due.
Know When to Negotiate
Getting more favorable terms for your vendor contract is not just about opening up the conversation; it’s also about knowing how to do so artfully. When you negotiate with a vendor, it’s important to keep the following in mind:
- Know what you want out of the negotiation. Are you looking to extend your payment terms, reduce prices, or shorten production time? Know ahead of time what you’re looking for and how much wiggle room you’re willing to give those needs.
- Know where your vendor stands. If your vendor or their industry is struggling, it may not be the right time to negotiate—or it may be the perfect time to negotiate. Having a feel for your vendor and their current position in business can inform how and when you go about your negotiations.
- Know the market. It’s best to go into the negotiation with knowledge about current market trends, including prices, lead time, contract terms, etc. With this information, you can better ask for what you need and have a better idea of how the vendor might respond.
- Be willing to walk away. If you’re unable to get the terms you need for your business strategy, be willing to walk away and find them elsewhere.
Share Your Forecast
While you shouldn’t share your trade secrets with vendors or lay all of your cards on the table, it can help with vendor contract negotiations to share forecasting information. The goal should be to share information that will help them serve you better.
Your financial forecast should have educated projections of what your inventory needs will look like month-by-month. Sharing these projections with your vendor rep can help them make adjustments to prepare for these needs and help inform their own sales projections.
Not only can this help you by enabling your vendor to have the products or materials you need when you need them, but it can also provide a bargaining chip for better pricing or terms.
Foster Your Relationships
It’s easy to look at relationships with vendors as one-sided—the vendor or sales rep wants to maintain a positive relationship with you to keep their sales numbers on track. However, a positive relationship benefits you as well, as a positive, trusting relationship with your vendor means you’re more likely to be able to negotiate more favorable terms.
Build relationships with your vendors by paying your invoices on time, being loyal with your orders, and establishing a positive rapport with your vendor sales reps. While these relationships may not produce benefits in the short term, in the long term, it can put you in a position to negotiate better terms or to make adjustments when unforeseen circumstances (such as COVID-19) hit.
If you run into a situation where you need to pay a bill late, communicate early and frequently. When you have a good relationship with your vendor, they’re generally more willing to allow you a little wiggle room in payments when you need it. Don’t forget to ask them to waive any late fees and/or interest that you may get billed. Most vendors are willing to do this in return for payments that honor your communicated payment schedule to get caught up.
Don’t Forget to Get Competitive Bids
Although it’s important to maintain positive relationships with your vendors, it’s also important not to be so loyal to those relationships that you forget to get competitive bids. It’s wise to keep a pulse on the market by occasionally reaching out to get bids from other vendors. At the very least, you can use these to validate the pricing you’re receiving from your existing vendors. At the very most, this can help cut costs if other vendors offer better pricing or more favorable terms—or put you in a position to negotiate these with your existing vendor.
It can be easy to either be overly loyal to your vendors, paying whatever they ask for their products because of your longstanding relationship, even if the prices are well above market value. It can also be easy to be overly disloyal, continually bouncing from vendor to vendor to achieve the lowest price, but sacrificing the benefits of a longstanding relationship in the meantime.
For the best vendor management strategy, it’s good to have a balance of both these traits: maintain positive, loyal relationships with your vendors, but don’t be afraid to get additional competitive bids at least a couple of times a year to enable you to change suppliers or negotiate better terms if you’re not getting the most bang for your buck.
Strategize Sales & Bulk Discounts
If you have a financial forecast in place, this means you’re also better equipped to take advantage of sales and bulk discounts. This is because a financial forecast helps you anticipate sales trends, letting you know what inventory you need—and when. More importantly, it also lets you know how long you will have to hold onto that inventory before it turns into revenue.
With this information, you can weigh the cost of holding extra inventory against the benefit of sales or bulk discounts from your vendors.
It’s important to remember that sales are intentionally used to incentivize buyers into purchasing more than they would otherwise. Because of this, those without a financial forecast should be cautious about taking advantage of these deals. Holding inventory too long not only increases financial risk, but also reduces the amount of capital available for other business-building strategies.
In inventory-driven businesses, your vendor contracts play a huge role not only in your profitability, but also in your cash flow. Being strategic about these contracts can reduce financial risk, improve cash flow, and reduce unnecessarily wasted spending. Many of these strategies take financial expertise and market knowledge. If your company lacks the resources to implement these strategies wisely, reach out. We’re happy to help.
About the Author
Jill Tavey is an experienced outsourced CFO with over a decade of high-level financial expertise and experience. Her ability to negotiate, make and maintain key relationships, and shape strategic direction has helped propel multiple companies through significant growth.
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