Amidst the fiercely competitive environment of an economic downturn, along with closely maintaining customer relationships and searching for ways to boost sales and profits, retailers must pay attention to cost cutting as a way to enhance their profit margins. One area that can bring significant material benefits to retailers is their accounts payable (AP).
For retailers, negotiating with suppliers can dramatically reduce costs, not only ones related to inventory—such as reordering costs, quantity discounts, and so forth—but also financing costs.
Aspects to consider when determining vendor payment terms
Negotiating vendor payment terms, tracking inventory from point of purchase to point of sale, and managing accounts payable can greatly improve financial management and cash flow management. Specifically, cost of capital, early payment discounts, payment due dates, and interest on late payments should all be taken into consideration and analysed carefully.
It should be noted that when negotiating terms, the lowest price might not bring the highest benefit; flexible payment terms might offer more advantage to a company’s cash flow. Sometimes, an early payment may be more beneficial than a payment made on the due date or a late payment with interest penalties, depending on the discount rate, interest, length of payment term, etc. For example, it is common for a company in a close relationship with suppliers to delay their payment till after the due date without incurring additional interest. In an economic downturn, many retailers find that they have more power in negotiating with vendors and suppliers. Some have taken advantage of this aspect and requested longer payment periods. Closely managing these advantages will help maximise financial benefits and foster better relationships with suppliers.
How to capture early payment discounts and optimise vendor payment terms
It is easy to see that accounts payable management has the closest link to these matters. In fact, many organisations have recognised that problems within their AP areas have been obstacles to maximising financial benefits from their payments. For instance, frequently, invoice processing takes too long from identification and verification to approval, which makes companies suffer penalties for late payments although they have enough cash on hand to pay on time. This may not only damage the vendor relationship, but may also mess up budgeting, forecasting, and financial control.
Identifying those problems and their causes and seeking solutions by revising and improving accounts payable management can increase financial visibility for better cash management and better vendor relationships.
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