Managing purchasing to maximize cash flow
One of the keys to effective cash flow management is keeping a close eye on your purchasing patterns. While many businesses focus their cash flow strategies on ways to boost receivables, supplier-related payables need to be watched just as prudently. Follow these tips to help you control these expenses and help your business prosper:
Get the best price
It may seem obvious, but it always pays to make certain you are getting the best price from your suppliers. Comparison-shop for commodity products where service and other value-adds are not critical. If you find lower rates, ask your entrenched suppliers if they'd be willing to match the price. Regularly review ongoing supplier contracts to be sure you're paying a competitive rate, and renegotiate deals where you're not. When looking for new suppliers, get a variety of quotes to ensure you can get the most for your money.
Maximize trade credit
If you're currently paying your suppliers in advance or COD, then you can boost your cash flow by getting vendors to extend you trade credit. Trade credit is basically an open account arrangement where you can purchase goods or services from your suppliers without having to pay for them at the time of purchase. Think of it as kind of short-term loan with no interest due if payment is made by the bill's due date. For example, trade credit of "net 30" means you have 30 days to pay your bill. Ideally, you will want to stretch payments as far out as possible to maximize your cash flow.
The amount of trade credit your suppliers may grant you will depend on a number of factors, including the suppliers' policies, your company's credit record and your purchase history with the supplier. Treat trade credit with respect. By paying your suppliers in a timely fashion and according to their terms, you can encourage them to grant you additional credit in the future while avoiding costly interest charges.
Ask for early payment discounts
If your suppliers are currently granting you trade credit, you may be able to request a discount for early payment. For example, credit terms of "2% 10 days, net 30 days" means you receive a 2% discount if payment is made within 10 days, with the net due in 30 days. Taking advantage of such a discount is the equivalent of getting a 24% return on your money. Some suppliers offer early payment discounts as a matter of course. If yours do not, ask for it. They may be willing to provide the incentive as a way to speed up their own receivables.
Keep a close eye on your procurement needs, and, when possible, space out your purchasing to avoid tying up funds in non-income producing assets. This is particular crucial if your business carries significant inventory, which can tie up financial assets. Be sure to track how quickly it turns over. Slow turning inventory can be a sign that you're overstocking, thereby hampering your cash flow.
Keep an eye out for deals... but be careful
When possible, take advantage of special deals and other incentives offered by your suppliers. For example, some vendors may reduce prices at the end of a product's life cycle to move excess inventory, or may have special introductory rates when a new line is added. On the other hand, don't get swept up in deals. Buying items in bulk to qualify for volume discounts may save you money, but you may also find yourself straining your cash flow with funds tied up in items you won't be using for several months.
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