Boost Cash Flow with Trade Terms21 Jan, 2010 By: Richard Flynn imageSource
Boost Cash Flow with Trade Terms
Even in a slow economy, the pace of the document technology business can be a
challenge to keep up with. As the economy puts pressure on customers, they’re
looking for new ways to do more with less and seeking new ways to generate
revenue, causing them to turn to your business for solutions. And, of course,
there are plenty of industry technology trends to keep up with. But while the
pace of change doesn’t seem to slow in a down economy, one thing that does
certainly slow for most small businesses is cash flow.
Although small business owners often focus on what’s new to keep their
businesses in step with competition, sticking to the tried and true is a strong
strategy for managing cash flow. Many small businesses, both your clients and/or
if you are a small dealership, rely on the time-tested tool of trade terms when
it comes to controlling cash flow. To make the end of the month a bit easier, it
pays to understand how trade terms work, how they can be used to even out cash
flow, and what you can do to gain access to trade terms, or similar tools. The
following provides the basics of trade terms along with tips on how to put them
to work for your business.
Help manage cash flow with trade terms
Trade terms are known by a number of names and are often referred to as
“supplier terms,” “trade credit,” “net terms,” “purchase terms,” “payment terms”
or simply “terms.” The premise behind the practice is simple. A company and its
suppliers agree on the timing of payments and how much is due at a given date.
Common agreements are “net 30” or “net 60,” meaning that a company must pay its
supplier either 30 or 60 days from the invoice date in full for a purchase. To
encourage early payment, suppliers may include an incentive of 1% or 2% for
customers who pay within 10 days.
When your business has cash and can make early payments, earning a 1% or 2%
discount is a great option that puts your cash to work. While the early-pay
discount may seem insubstantial, a consistent discount over a year’s time can
add up to considerable savings. In a slow economy when profits are slim,
discounts like this are a valuable tool for boosting margins. If your company,
for example, is able to mark up equipment or services for a profit of 10%, then
an additional 1% received from a supplier for early payment simply widens your
margin to 11%.
There are, of course, times when an early payment isn’t an option. To help
alleviate this classic cash-flow crunch, some vendors offer trade terms that
will permit you to delay payment. Under these terms, customers agree to make a
designated partial payment and then defer full payment for a specified term,
such as for an additional 30 days.
Actively pursue trade Terms
Whether you’re in a position to earn a discount or need to defer payment,
trade terms are a great tool. It’s important, however, to recognize that trade
terms are not automatic; they must be earned. Additionally, not all suppliers
can be expected to offer trade terms to customers. But perhaps more important,
those that do offer trade terms are selective about who receives them. Suppliers
don’t want to take the risk of offering a discount to customers who will simply
take the discount and then pay late. Likewise, they are cautious when extending
deferment options, because doing so amounts to financing free short-term credit
Since trade terms are offered only in limited situations, receiving this
privilege may require effort on the part of the customer. Approach your vendors
with the goal of negotiating more favorable terms, keeping in mind some vendors
simply don’t offer them, and that it may take time to earn the privilege.
Because trade terms are about trust & credit-worthiness, you can expect the most
from companies with which you have the longest & best relationships.
In cases where you haven’t been successful in negotiating trade terms,
consider ways in which you can make your business more attractive to vendors.
Begin by looking at what makes your best customers valuable and use that
knowledge to make yourself a better customer. The volume of business a customer
provides, for example, is a significant factor in a customer relationship, so
one way to earn more favorable terms may be to offer to consolidate your
business for a particular type of goods or service with a single vendor. Another
factor that affects how vendors see you is the regularity of your business.
Perhaps you can look at your ordering patterns and decide whether you might
formalize a standing order with a particular vendor instead of sending orders on
an irregular basis.
There will always be vendors who don’t offer trade terms, or situations where
you won’t be offered special terms. Furthermore, there are simply many kinds of
expenses, such as utilities and phone bills that will never qualify. In these
cases, look for other ways that you can improve cash flow. Using charge and
credit cards that offer cash back or other rewards is one way of earning a
discount. Another possibility is to use cards that offer trade-like terms such
as the Plum Card from American Express OPEN. By offering trade-like terms on
nearly all purchases, the Plum Card’s terms have provided more than $80 million
in savings since the beginning of the recession to small businesses that use the
card. Also consider other non-cash payment methods, such as bartering and using
rewards from credit and charge cards.
Keep credit records in order
Whether you already receive trade terms or hope to qualify in the future, it
is important to establish and keep a strong credit record. Doing so will help
you keep the terms you may already have and help you earn more favorable terms
later. If you’ve worked hard to build a strong credit record, then don’t keep it
to yourself. Make it easy for vendors and credit issuers to confirm that you’re
an established business. You can do so by registering with commercial credit
bureaus like Dun & Bradstreet and the Small Business Financial Exchange. Be sure
that the credit records on file are accurate. Contact credit bureaus to verify
info in your credit report & check your company profile for errors. If you do
find irregularities, address them immediately to maintain good standing. While
it’s important to keep pace with the industry & your competition, remember that
every move you make needs the support of a healthy cash flow. By minding cash
flow with proven tools like trade terms, you’ll improve your business’
resilience and position yourself to take advantage of the many opportunities
that will come when the economy rebounds.
Richard Flynn is senior vice president and general manager for American
Express OPEN, the nation's leading issuer of card products for small business
owners. Contact: PedroR@mbooth.com for