Boost Your Bottom Line With Trade Terms

Richard Flynn

Richard Flynn

February 1, 2010

8 Min Read
Boost Your Bottom Line With Trade Terms

Although device company executives may dream of developing the next pacemaker, the reality is that most successful products are more modest than one of the industry’s most significant medical breakthroughs. When looking at a device manufacturer’s financial well-being, it’s important to keep this perspective in mind, because in much the same way, companies typically make their important business gains in small increments. This consistent approach contributes to both strength and stability over time. Managing cash flow is one such tried-and-true method.

Cash flow management is a game of balance and one that is often won in steady, consistent steps. Although there are sophisticated strategies and approaches to managing cash flow, every company can benefit from a solid understanding of some basic financial tools. Trade terms are one of the most useful of these tools.


A true classic in the cash flow toolbox, trade terms already help many small business owners. However, just as many small business owners fail to take advantage of them. Some proprietors may feel significant trade term benefits are out of their reach, while others may not understand how helpful they really are for improving liquidity. So, to help you maintain healthy cash flow, keep the following basics and tips in mind in order to put trade terms to work for your device business.

Trade Term Essentials

Most business owners know trade terms by a number of names. These include “supplier terms,” “trade credit,” “net terms,” “purchase terms,” “payment terms,” or simply “terms.” Regardless of what they’re called, the basic idea behind trade terms is the same: A company and its suppliers agree on the timing of payments and how much is due at a given date. Common agreements are “net 30” or “net 60,” meaning that a company must pay its supplier in full either 30 or 60 days from the invoice date. To encourage early payment, however, suppliers may include an incentive of 1% or 2% for customers who pay within 10 days.


When your business has cash and can make early payments, earning a 1% or 2% discount is a great option that puts your cash to work. While the early-pay discount may seem insubstantial, a consistent discount over a year’s time adds up to considerable savings. In a slow economy when profits are slim, discounts like this are a valuable tool for boosting margins. If your business earns a margin of 10% on a particular component, then the additional 1% received from the component supplier for early payment essentially widens your margin to 11%.


There are, of course, times when an early payment isn’t an option. To help customers avoid a cash-flow crunch, some vendors offer trade terms that will permit you to delay payment. Under these terms, customers agree to make a designated partial payment and are permitted to take the goods and defer full payment for a specified term such as an additional 30 days.


Pursue Better Terms

Whether you’re in a position to earn a discount or you need to defer payment, trade terms are a useful tool. The first step to gaining better terms is to recognize that not all vendors offer them, and for those who do, they’re not automatic. Companies are selective about who receives trade terms because they don’t want to take the risk of offering a discount to customers who will simply take the discount and then pay late. Likewise, they are cautious when extending deferment options, because doing so amounts to financing free short-term credit for customers.


Since trade terms are offered only in limited situations, receiving this privilege often requires the customer to make the first move. Approach your vendors with the goal of negotiating more favorable terms, keeping in mind that it may take time to earn the privilege. Because trade terms are about trust and creditworthiness, you can expect the most from companies with which you have the longest and best relationships. The better your track record overall and the better a company knows your business, the more likely you are to be rewarded with more favorable terms.


In cases where you haven’t been successful in negotiating trade terms, consider ways in which you can make your business more attractive to vendors. In addition to a good credit record and a healthy vendor relationship, other factors can tip the balance in your favor. Consider the things that make your best clients valuable to you, and use that knowledge to make yourself a better customer. The volume of business a customer provides, for example, is a significant factor in a customer relationship. With this in mind, perhaps you can consolidate your business for a particular type of goods or service with a single vendor. Another factor that affects how vendors see you is the regularity of your business. Look at your ordering patterns and decide whether you might formalize a standing order with a particular vendor instead of sending orders on an irregular basis.


There will always be vendors who don’t offer trade terms, or situations where you won’t be offered special terms. Furthermore, there are simply many kinds of expenses that will never qualify, such as utilities and phone bills. In these cases, look for other ways that you can improve cash flow by delaying payments while still meeting your financial obligations. Also look for alternative ways of earning discounts wherever possible.


Using charge and credit cards is one way to delay payment while still making sure suppliers are paid in a timely manner. Some also present the possibility of earning a type of discount in the form of cash back or other rewards. Another alternative that can improve cash flow is to use cards that offer trade-like terms.


There are more ways to improve cash flow, such as finding cash-free alternative payment methods beyond simply using credit or charge cards. For example, if you’re using credit and charge cards, make sure you’re actually using the rewards you earn to your best advantage.


Mind Your Credit, Manage Growth

Whether you already receive trade terms or hope to qualify for them in the future, it is important to establish—and keep—a strong credit record. Doing so will help you keep the terms you may already have and can help you earn more favorable terms later. If you’ve worked hard to build a strong credit record, then don’t keep it to yourself. Make it easy for vendors and credit issuers to confirm that you’re an established business. You can do so by registering with commercial credit bureaus like Dun & Bradstreet and the Small Business Financial Exchange.


You’ll also want to make certain that the credit records on file are up-to-date and accurate. Contact credit bureaus to verify the information in your credit report and check your company profile for errors. If you do find mistakes or irregularities, be sure to address them immediately to maintain good standing.


There are few downsides to growth, but one undesirable outcome is that unmanaged growth can take a real toll on cash flow. To keep cash flow even, manage growth whenever possible to keep it consistent and even, avoiding sudden and dramatic leaps. When growth opportunities arise, plan carefully with an eye on cash-flow projections. And each time you invest in growth opportunities, stick to the essentials: Every investment, whether in materials, labor, or equipment, should have a clear return. Make sure each will earn a profit, and look at how long it will take to collect that profit. Additionally, make a conscious decision about how much you have to spend in order to reach your goal and how long it will be before you pay back any associated debt. Likewise, if you look at each customer as an investment with a scheduled return, you’ll not only improve cash flow but your profitability as well.


Since debt is usually necessary in times of growth, make sure you have a plan in place for when cash is needed to take advantage of opportunities. Likewise, it’s important to have a backup plan for short periods where you simply need to cover a temporary cash shortage. To cover both situations, be certain your company is prepared with several sources of financing in advance. One of the reasons it pays to plan ahead is that some financial institutions may be more likely to extend lines of credit or loans when your company is in good financial health, and less likely when cash flow problems have already taken a toll on your finances.


When seeking financing, be sure to explore whether your business may quality for special lending programs, such as those designed to assist small businesses owned by women or minorities. Once you have credit available to you, use it as it was intended for short-term financing options such as lines of credit, short-term loans, or credit cards toward short-term cash needs. Likewise, use long-term or secured loans for the purchase of long-term investments.


In today’s slow economy, managing cash flow may sometimes seem to be more about maintaining an even keel than preparing for significant growth, as nearly every company faces later payments from customers. But the cash flow lessons learned today are about more than steady-as-she-goes. Those companies that develop the slow and steady discipline of cash flow management will have the tools to take on new challenges and growth opportunities when an economic recovery does eventually come.


Richard Flynn is senior vice president and general manager for American Express OPEN, an issuer of card products for small business owners. For further information contact [email protected].

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