Your Profits: A Simple Trick to Improve Profitability
The business environment for glass distributors and other companies in the industry is highly competitive. Profit margins are tight, so companies need to find ways to maximize gains. For many, increasing prices is a risk that can backfire by decreasing sales. Therefore, the alternative is to focus on cutting costs.
One simple way to cut costs is to ask suppliers to give your company a discount for paying invoices early. Most vendors will consider offering a discount, often 2 percent, if you pay in 10 days or less. Obviously, any vendor costs that you cut will drop straight to your bottom line and increase your profitability.
While this trick is simple, it has to be implemented carefully. Using it incorrectly could actually lead to cashflow problems.
Is this technique a good alternative for your company?
In general, you can apply this technique if your company has enough available cash and if your vendors are willing to provide the discount. This first point is critical. Your company must be able to afford paying early without affecting other important payments. Also, don’t start paying vendors early unless you have built a financial reserve to handle emergencies. Basically, the objective is to use “extra money” to generate this increase in profitability.
The second point is that your vendors must be willing to offer a discount in exchange for early payment. Some will and others won’t. It’s a matter of asking and negotiating.
What to ask for
When you negotiate these terms with your vendors, request the terms you usually get (e.g., net - 30, net - 45, etc.) with the option to get a discount if you pay early. However, you don’t want the obligation to pay early. For example, if you get net - 30 terms, your invoice might note the discount as follows “2% 10, net 30” or “2/10 net 30”. Having the obligation to pay early could create problems later on.
Selecting your vendors
A number of variables go into selecting which vendors to approach for a discount. Obviously, you want to select vendors whose invoices you will be able to pay early on a regular basis. However, if you can, select vendors that report information to commercial credit bureaus. Many large companies report to credit bureaus. It’s just a matter of asking your accounts payable representative if they report this information.
Paying vendors that report credit information to the bureaus has the advantage of improving your commercial credit profile. Your company gets two benefits: higher profits and better commercial credit. These benefits will also allow you get better payment terms from vendors in the future. For more information on building credit with your vendors, please read, “Your Profits: The Right Way to Build Credit with Your Vendors” from the April 2014 issue of Glass Magazine.
Keep an eye on cash flow
It’s important to monitor your cash flow as you transition from paying vendors on regular terms to paying them in 10 days or less. Make sure that your assumptions are correct and that you can afford to pay early.
Monitor your cash flow regularly. If you notice any sudden decreases in available cash flow, revert to paying invoices on regular terms until the issue has been resolved. This last point is why it’s important to have the option — but not the obligation — to pay in 10 days.
Consult a CPA
Lastly, consult a CPA or your finance team before making the transition to quick vendor payments. They can review your past and current financial statements and determine if this plan will work for you. Do not implement this plan until you have thoroughly reviewed your statements and have implemented a plan to regularly monitor cash flow. Otherwise, the plan could backfire and create problems.