A crucial aspect of procurement is negotiating payment terms with your supplier.
Supplier payment terms impact so many other parts of a trades business. It impacts the relationships you have with your suppliers, how much working capital you have in your treasury and how much cash on hand you can expect to have at any moment.
Negotiating supplier payment terms means striking a balance between protecting your own company’s cash flow, and protecting the working relationship you have with your suppliers.
Below are some tips for striking that balance.
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Protect Your Cash Flow
You often see cash flow described as “the lifeblood of any business,” and that’s exactly right.
Knowing how much cash you have now and will have in the future makes it easier to forecast, plan work, be flexible when necessary and maintain strong relationships with your suppliers. The more cash available, the more stability you can create for your business.
But as every trade construction business owner knows, there are constant threats to a company’s cash flow. “Cash flow is a common issue in the construction industry due to incorrectly quoted work, changing scope of projects, high wages and long payment terms on invoices,” the team at invoice finance provider FundTap writes.
Having a full treasury helps hedge against these issues. “Establishing a sizeable cash reserve is still the wisest approach and can protect your company’s profitability in the longer run,” writes Patrick Hogan, CEO of Handle.com, which helps contractors and material suppliers with lien construction financial management and payment compliance.
This is where supplier payment terms come in. Payment terms define “how and when you pay the companies that supply you, in particular the amount of time that you have in which to pay,” Simon Brooke at financial management company Sage writes.
Very few companies can afford to pay for a construction project’s materials upfront in cash. So, they set up payment terms with their suppliers to ensure the vendors get paid, but not at the expense of the construction company’s cash flow.
Keep Supplier Relationships Strong: 3 Negotiation Tips
Suppliers will often work with their construction company customers to set payment terms that are favorable to both parties.
For anyone negotiating on behalf of a trade contractor, it’s important to keep that win-win perspective in mind as you negotiate with suppliers. Here are three tips to help with that:
Look through your own historical procurement documents to see which supplies put the most strain on your cash and which supplies have the biggest impact on your business. Plumbers, for example, might put greater emphasis on the cost of their PVC pipes and fittings, so it would make sense for them to be strategic about the terms they agree to with those suppliers.
From there, define your negotiation goals. “Are you looking for a price reduction?” the team at Courier Media writes. “Are you looking for a discount for buying in bulk? Think about what your supplier might counter-offer and what you’ll concede. Write a list of non-negotiables that you won’t sway from, as well as what’s high and low on your priority list.”
2. Spread Out Your Accounts Payable
You don’t want all of your supplier invoices coming due at the same time. Ideally, as the team at Dryden Group writes, you could sync accounts payable with deliverables or payments from your own clients.
“For example, you may choose to base the payment schedule on your company’s project earnings during the next quarter. Ensure the payment terms are reviewed by legal counsel before you agree to them.”
3. Ask For As Much As You Can
“This is a negotiation, meaning there will be some back and forth as [you] come to terms that work for both parties,” Emily Heaslip writes for the U.S. Chamber of Commerce’s publication CO.
“For instance, if you need more time than your normal 30-day payment terms, ask for 60 days. You may end up with 45 days, but that’s still better than where you started. It can help to research other suppliers and vendors as a point of leverage and as a backup, in case your negotiation falls through.”
Invest in the Right Tools to Maintain That Balance
Cash flow problems are one of the biggest contributors to construction company failures. When these businesses can’t pay their bills on time, they risk bankruptcy even if they’re profitable.
This tends to happen because those businesses have no visibility into their cash positions. “Many construction companies can’t track if they’re making or losing money until the very end of the year,” management consultant Larry Kokkelenberg writes at Pit & Quarry. “Some companies even fail to bill for all of their work because they are so busy completing projects and doing estimates for new projects.”
This is one reason why strong documentation is so important for subcontractors and trades businesses. Knowing in an instant what your material costs are, what liabilities you have and when you need to make payments helps you protect your cash flow.
To see how construction management software like eSUB can help you with that work, schedule a demo today.
Images used under license from Shutterstock.com.