payment termsWhy are the payment terms you negotiate with suppliers and customers important to your business?

They BOTH have a direct impact on the cash within your business and your ability to invest in all other areas of your business such as staff training, additional resources, another office, marketing, the sales team and so on.

The ideal is to get your customs to pay as quickly as possible, or in advance while paying your suppliers as late as possible without incurring higher prices.

Improving your payment terms with suppliers and to customers is the only long term way of reducing your investment in working capital investment (Stock, Debtors and Creditors)

Businesses that receive cash before paying cash out create a significant competitive advantage.  In effect these businesses’ suppliers are funding the business.

Negotiating better payment terms will depend on many factors including:

  • Your business’ bargaining power versus your clients or suppliers
  • Your approach and who you negotiate within the respective businesses
  • Your skill in negotiating
  • The value your provide to the other party vs your competitors

The process of changing payment terms can take time to implement, particularly if you have contracts spanning several years in place

 

A business wide approach

All areas of the business should be involved in negotiating better payment terms. As a guide:

  1. Customer terms  :  Directors, Sales, Account Management, Finance
  2. Suppliers terms   :  Directors, Operations, Procurement, Finance

If only one department is tasked with improving payment terms the project is less likely to succeed

A clear framework / payment terms guidelines should be signed off at Board level. The framework should be communicated clearly and regularly to all staff involved in dealing with customers and suppliers

Incentive schemes should be amended for all staff tasked with delivering improved payment terms for both customers and suppliers. This should also include directors

 

The Sales process

Payment terms should be part of the sales process and the sales team incentives should include payment terms as part of the assessment metrics

There is usually a trade-off between price and payment terms during the process of winning new work. A clear framework should be communicated to the sales teams on a regular basis. Actual payment terms agreed should be checked as part of the signoff procedures for each contract

 

The Purchasing process

As with Sales, payment terms should be a selection criteria alongside price and operational requirements

Your key suppliers are the most important suppliers with whom to negotiate beneficial payment terms as they are likely to represent a large proportion of your spend. Managing your supplier base for payment terms can have a dramatic impact on your working capital investment

 

When to negotiate payment terms

The most effective time to negotiate payment terms is while you are negotiating the services / products supplied or received and the price of these. Setting expectations early in the process is vital. If your business is focused on managing its cash investments, payment terms should be as important as price in these negotiations

Once a contractual position has been entered into, it is extremely hard to negotiate amendments without impacting other aspects of the contract such as price

 

Early payment discounts

In the currently low interest rate environment be very wary of offering (or accepting) discounts for early payments to customer. It may well be significantly cheaper to take financing from banks via products such as invoice discounting

Do look at your supplier base and track any suppliers that are offering generous early payment discounts

 

In summary:

  • Improving payment terms is a business wide activity and needs support from Director level downwards
  • Agree a framework internally and ensure that this is communicated clearly and regularly
  • Negotiate payment terms alongside the product/services and price before the contract is finalised
  • Review key customers and suppliers. Plan how you are going to improve the payment terms you hold with then in advance of contract renewals

 

Contact us to have a free discussion on how best to approach setting or re-negotiating payment terms with your customers and supplier

 

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