How well do you manage your suppliers?

While choosing the right supplier is paramount to your ability to provide a quality service and outcome for your client, many business owners don’t realise that their choice of supplier will also affect their cash flow.

In some cases, you will be required to pay your suppliers upfront when you purchase materials, while others will allow you to purchase materials and supplies on credit. Both arrangements require different cash flow management strategies.

Here are some helpful hints to consider when choosing your supplier:

  • Does your supplier provide the best quality product?
  • Does your supplier have a returns policy?
  • Does your supplier offer a competitive price?
  • Do you use various suppliers for similar products? (It is important to have an alternate supplier for any given product to cover the risk that they cannot provide a product at any given time.)
  • Does your supplier offer you credit terms?
  • Does your supplier offer discounts for early or upfront payments?

Making full use of your payment terms with any supplier is effectively like having an interest-free loan. Therefore, it is important to manage your suppliers and the payments to them effectively.

For example, a client of mine is in property development and regularly goes to Bunnings to purchase a range of materials and tools for his developments. In the past, he would pay for all the items using his own credit card or cash, at an out-of-pocket cost of $5,000–$10,000 per month.

I asked him whether he had set up an account with Bunnings only to find, to my surprise, that he had not. Bunnings, like a number of suppliers, will offer trades an account and therefore credit terms. So we proceeded to set up an account online in a matter of minutes. It provides him a $10,000 credit limit with no fees and 60 days’ interest-free terms. He even has the option to allocate job numbers to every purchase.

My client was able to free up his cash and his credit card and was able to save on interest he would otherwise have been charged. The additional hidden benefit was that he then had online statements, which slashed the amount of time he spent sorting out all the individual receipts and payments.

The real jewel in the above example is that he was able to use someone else’s money (Bunnings) to purchase items that enabled him to continue to work on his developments to finish jobs and, ultimately, get paid. Unsurprisingly, his ability to manage his cash has increased greatly.

When you have established credit terms with a supplier, ensure you pay on the agreed terms, not early or late. And, where possible, seek to extend trading terms to assist with any fluctuations in cash flow.

In every relationship, communicate regularly and maintain a good working relationship with your suppliers so any future issues can be resolved with little or no impact to your business.

Please consider these options and do everything in your power to improve your cash flow. It will relieve some significant stress on your business when cash is a little tight.

If you would like to discuss these or other strategies, do not hesitate to get in touch.

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