Every business has the problem that clients want to take their time to pay you, but suppliers want you to pay them as soon as possible.
So, what happens is that a poorly managed cash turnover cycle causes you to fall into a negative cash cycle, meaning you are giving money away before receiving money from your customers.
In the previous edition of Your Business I wrote about debtor management, which is part one of a three-part series around managing your cash turnover cycle. This article will cover the second part, namely managing your suppliers.
Supplier management consists of many parts, but due to your time constraints as an entrepreneur there are two aspects that you need to focus on:
2.Supplier payment management
The reality is that any you cannot deliver products or services to your customers without purchasing goods or services from suppliers. Who is a supplier? That will be anyone who you pay for goods or services during the year to enable you to deliver your service.
Suppliers can be further separated into two categories, namely: Cost of sales and overheads.
Your goal with overheads is to reduce them over a period of a year. The questions you need to ask yourself is: Where I can obtain this service and pay as reasonable price over a period of a year. You generally don’t correspond with these suppliers on a monthly basis and only tend to contact them when there is a problem with the service agreement you have set in place. Examples are: Internet, telephone, electricity.
Cost of sale suppliers (COSS) provide the direct materials or services that enable you to provide your product or services to your customers. For example: If you manufacture clothing your COSS will be those suppliers that provide you with material, buttons, zips, etc. If you are a plumber your COSS will be your providers of geysers, pipes, etc. You tend to correspond with them on a regular basis and they are also where you spend the most of your money during a year. Your goal with price negotiations is to improve one or more of the following indicators:
1. Price per item;
2. Delivery time;
3. Payment terms;
4. Reorder quantities.
You, like most people have likely tried to find a better price by shopping around for goods or services and this has led to you purchasing goods from different suppliers. For example, a restaurant owner who purchases their dry goods from different suppliers scattered all over the city.
Your negotiating power is realized when you combine all your purchases and discuss your “grocery list” with each of your suppliers to find out what their best price will be for the goods that you need and enter into conversations with each of them to find out where they are willing to make concessions.
Supplier payment management
As mentioned earlier your problem is that your suppliers want their money today, and your customers want to pay you next month. The reality of your business is that you have more bargaining power than you realize.
As business owner you constantly need to renegotiate payment terms with your suppliers as you improve your working relationship and prove that you are a reliable payer. You also need to ensure that you negotiate for early settlement discount as this is another way that you can lower your COGS.Then you need to ensure that you pay your suppliers within the payment terms allowed.
“Remember the goal is to reduce the cash turnover cycle as much as possible as you want to be in a position where you receive money first, have it in your account for a period of time and earn interest and then pay your suppliers.”
Frans van Eden, AGA (SA) is MD of Prioritse, specialising in tax planning, insurance, financial advice, accounting and corporate structuring. Email firstname.lastname@example.org to find out more about using your cash turnover cycle to improve the cashflow. Visit: www.prioritise.co.za