Q: What are good ways to negotiate longer payment terms with suppliers? Is it a good way to manage our cash flow?
A: Negotiating for longer payment terms is one way to manage your cash flow. When you delay paying your suppliers, you actually have additional cash inflows for a time because the money that is supposed to be spent is added back into your cash reserves.
You can delay paying your suppliers when there is an opportunity, but do not do it all the time. If you are habitually late in paying, your suppliers will sooner or later catch on and you may lose some valuable suppliers that could affect your business.
Negotiating with your suppliers for longer terms depends on your ability to pay and how much business you can give to your supplier. If you are known to your supplier to have good credit standing, you will probably manage to get longer payment terms.
Normally, to be able to establish good credit standing, you must have established a certain track record with your supplier in terms of the volume of business that you provide, the number of years that you have dealt with them and the history of your payment patterns.
It also helps if you are personally known to the supplier. If not, you can ask your relatives, personal friends or business partners who have already done business with these suppliers to be your references and to vouch for your credit worthiness.
Henry Ong, CMC, CMA, is president and COO of Business Sense, a business advisory firm that provides expert solutions to small and medium sized companies. You may reach him at email@example.com.