Due to the rising cost of living, many businesses are currently struggling with cash flow. One of the best ways to improve your cash flow is to negotiate better terms with your suppliers. However, suppliers are also feeling the pinch given the current inflation rate, so how can you negotiate better payment terms without jeopardising your relationships?
The Challenges of Rising Costs
Rising costs pose significant challenges for businesses. With the current inflation rate, many businesses are struggling to maintain their profit margins. This is especially true for businesses that have not hedged against rising costs or have not been able to pass on the costs to their customers.
In addition, businesses also feel the squeeze from their suppliers who are struggling to cope with the rising costs. As a result, businesses are finding it increasingly difficult to negotiate better payment terms with their suppliers.
The Need to Negotiate
It’s important to take proactive steps to protect your business against the current crisis, and this includes negotiating better payment terms with your suppliers. By doing so, you can free up much-needed cash flow which can be used to invest in other areas of your business.
However, it’s important to approach negotiations with your suppliers carefully. Given the current climate, many suppliers are struggling to cope with the rising costs. As a result, they may be less willing to negotiate on payment terms.
So how do you approach these negotiations without jeopardising your supplier relationships?
Terms to Understand
Before you start negotiating payment terms, it’s important that you clearly understand your supplier invoices. Here are a few examples of terms you need to understand before entering negotiations:
- PIA = Payment in Advance
- Net 7 = you need to pay seven days after receiving the invoice
- COD = Cash on Delivery
- EOM = End of the Month
Offer to Pay in Advance
Many suppliers will offer a discount if you pay them in advance. If your current cash position allows you to do this, then it’s worth considering as it will save you money.
However, you need to be aware that if you don’t have the cash to pay, then this could put your business in a difficult position. As such, only offer to pay in advance if you’re confident that you can meet the payment without jeopardising other aspects of your business.
Don’t go in all guns blazing and try to negotiate with every single supplier at once. This will quickly overwhelm you and is likely to result in poor negotiations.
Instead, focus on your most important suppliers first. These are typically the suppliers you spend the most money with, giving you more leverage since they won’t want to lose you as a customer.
Extend Payment Terms
Longer payment terms can be really helpful when it comes to improving your cash flow, even if you don’t get a discount or even end up paying a little more. This is because it gives you more time to generate revenue and pay the supplier.
If you’ve got a lot of money tied up in inventory or accounts receivable, extending your payment terms can be a lifesaver because you’ll have more time to free up capital and pay the supplier.
Be Honest – and Helpful
Your suppliers are only going to negotiate with you if there’s something in it for them. If you simply threaten to take your business elsewhere unless they give you a discount, they might just let you walk away. Then, you’ve ruined a perfectly good supplier relationship for nothing.
Instead, it’s important to be honest with your suppliers about your current situation. While you don’t want your suppliers to think that you’re in financial trouble and cause them to lose faith in you, you do need to explain your current situation and why you’re looking to negotiate.
For example, you might explain that you’re in profit but looking to improve your cash flow, and you will then be able to spend more with them in the future.
It’s also important to offer solutions. Ideally, you’ll be able to find an arrangement that benefits the both of you. For example, receiving a discount in exchange for paying in advance, or agreeing to pay a slightly higher price in exchange for longer payment terms.
Benchmark Your Business
It could be that you’re paying too much for your supplies in the first place. Before you start negotiating payment terms, it’s important to benchmark your business against others in your industry.
It’s a good idea to speak to an accountant or financial professional who specialises in your industry to get an idea of what you should be paying. This will help you to understand whether or not your suppliers are overcharging you, and enable you to negotiate from a position of strength.
Entering into negotiations with your suppliers can be a great way to improve your cash flow and get better terms. However, it’s important that you approach negotiations in the right way. Be honest, be helpful, and focus on finding a solution that benefits both you and your supplier. This way, you’re much more likely to be successful in protecting your business against the rising cost crisis.