Tips for Small Business Owners to Negotiate Payment Terms with Suppliers
Running your own business is no child’s play. As if routine business tasks such as quality control, effective marketing, balancing demand and supply, and aiming for higher profits weren’t hard enough, businesses also have to deal with inflation, constantly changing tariffs and interest rates, financing challenges, and socio-political stress.
Macro-economic challenges often hit small businesses harder, as they are less resilient and less well-connected than major businesses. Disruptions in the supply chain or shortages of raw materials due to geopolitical issues can deeply affect your cash flow and operational stability, and these problems can snowball over time.
How Negotiating Payment Terms Can Unlock Flexibility
One often underappreciated way to navigate uncertain times is to negotiate better payment terms with suppliers. The key lies in acting before calamity hits: negotiating better payment terms when the going is good, and in your small business, being in a stronger position to convince your suppliers of your terms. Here are some payment terms you can negotiate to unlock financial flexibility.
1. Scheduling Payments: Different payment schedules for small and large orders allow greater flexibility and easier cash flow management. For instance, Net 30 terms, i.e., payment within 30 days, for smaller orders, help the supplier as he gets upfront or faster payments. But Net 45 terms for larger or higher-volume orders give you more time to pay, without burdening your cash flow or drying up your own financial resources.
2. Milestone-based Payments: If you are negotiating larger orders, you can set payments on milestones or stages linked to the manufacturing process. For example, you can pay 25% as an advance, 50% during production, and the remaining 25% upon delivery of the goods. This will keep money flowing in for the supplier while also not cramping your cash flow.
3. Paying Early: Some suppliers offer discounts on early payments, which can be a win-win situation for them as well as you. Moreover, such offers and negotiations can lead to a better understanding between the parties, thereby further strengthening relationships in the long term.
4. Extended Payments: If you have a long-standing relationship with your supplier, you can also ask for extended payment terms that are in sync with your accounts receivable. This helps maintain financial stability without exhausting your cash flow.
Offering the above options to your customers can help you better structure and manage your payment schedules, while reducing your dependence on loans or additional funding from investors.
How Can Small Business Owners Prepare for Negotiating Payment Terms with Suppliers?
Although negotiating payment terms sounds simple, it requires extensive calculations, research, and forecasting to determine favourable terms and agree to them. A professional accountant can help you iron out all these details and strengthen your negotiation. Here’s how:
1. Understand Your Cash Flow
You first need to understand where your business stands financially and what its cash flow requirements are. For this, an accountant will have to analyze invoices, spending patterns, and the past couple of years’ cash flow data, and identify financial trends, business impact, and other necessary details, such as average payment amounts per vendor and payment timing. Based on this data, the accountant can create various cash flow models to present to and discuss with the supplier.
2. Forecast Cash Flow Using Different Scenarios
Envisioning various scenarios and their impacts on both parties can help determine which payment model works best. For instance, comparing a Net 30 plan with a Net 60 plan for high-volume orders, and analyzing the benefits and pitfalls of each with respect to the supplier’s business and your own, can help zero in on an ideal payment model. Using past data and current market conditions to forecast future trends or financial conditions can also insulate both your businesses against potential downturns.
3. Study Supplier Policies and Industry Standards
Each industry is unique. Understanding the differences in industry standards, rules, expectations, and supplier policies is necessary for negotiating fair payment terms. While manufacturing or construction businesses, which involve long processes, usually use Net 60 or Net 90 payment terms, retail businesses with over-the-counter customer relationships, such as shops or restaurants, typically use immediate payment terms.
Tracking the average number of days your payment is delayed to your supplier also gives you insight into the difficulties they face. Understanding your supplier’s challenges and creating a payment model that addresses them and also benefits your business increases the likelihood of approval.
4. Use Data to Make a Compelling Pitch
Supporting any suggestions with numbers helps the supplier see the potential outcome in monetary terms. Compiling relevant reports, payment histories, sales trends, and financial forecasts can make your pitch more effective. Apart from industry and market data, pressing your case by showcasing your business’s strength, stability, and growth potential is also essential.
If you are negotiating for extended payment terms, then showing how your business is seasonal in nature through fluctuations in sales patterns can be convincing. Or if you prefer milestone-based payments, try explaining how they can better align with the cash flows of both parties, with relevant cash flow projections.
Remember, being honest and transparent about the reason for these negotiations is important.
5. Focus on Mutual Benefit
A negotiation must be mutually acceptable, beneficial, and balanced. Hence, you must also consider any problems or points raised by the supplier during discussions. Note that all your suggestions may not be accepted. Hence, it is always better to have an alternative. So, if a supplier is not ready for a Net 45 term, you could propose a Net 40 with a larger volume. You could also pitch early payment discounts, highlighting the benefits of quicker access to funds (while also cutting down on your costs), or how extended payment terms can lead to repeat and long-term orders, which can increase your chances of securing a good deal.
6. Document the New Payment Terms
Once all points are agreed upon, put them down in writing. Clear, transparent documentation of the negotiated terms of payment, payment amounts, payment modes, invoice requirements, discounts or penalties, delivery conditions, etc., is crucial to avoid future disputes or legal hassles. As your work progresses, regularly monitor that everything is going according to the negotiated plan. Any required adjustments can be made by communicating with the supplier. Being careful and thorough will lead to better outcomes for your business and help you establish stronger, long-term relationships with your suppliers.
Remember, the best time to negotiate terms is when you don’t need them immediately. Identifying and addressing issues early gives you more time and leverage during negotiations. Having a professional accountant at your side through such major negotiations can increase your chances of securing the best possible deal for yourself.
Contact KSSP Partners LLP in Markham to Help You with Supplier Negotiations
Talk to a professional accountant to help you crunch the numbers and come up with payment terms that can ease your cash flow needs. At KSSP Partners LLP, our accountants and bookkeepers can provide services such as preparing financial statements, cash flow projections, and managing accounts payable. To learn more about how KSSP Partners LLP can provide you with the best accounting and business consulting services, contact us online or by telephone at 289-554-5997.
