Vendor Payments and Cash Flow — Are They Inversely Proportional?

Payment Practices Poll taken by The Hackett Group in 2016 discovered that “nearly one-quarter of all supplier invoices are paid late.”

Delaying supplier payments isn’t surprising at all because any organization’s AP team would like to keep company cash in your account as long as possible. Typical vendor payment terms include “net 10,” “net 30,” or even “net 45.” The longer the payment term, the more time you have to pay to your vendor, and the more fluid your monthly cash flow could be. Hence, it is advisable to negotiate the most extended payback terms as far as possible. However, also ask for discounts for early payments when your cash flow permits.

Research says that receiving a 2% discount for early payment instantly improves your company’s bottom line by a corresponding 2%.

But this is a one-sided story. Have you ever thought about your vendor’s preferences on payment terms? Do they quickly agree to get paid late? Undoubtedly, cash management is a crucial aspect. Delaying vendor payments can slow cash outflows, providing the float needed to sustain operations during difficult times. But are suppliers happy with you not paying them on time? Maybe yes or maybe no? Each strategy will have a flip side. When a company delays vendor payment, the relationship with the supplier can diminish, and penalties might apply because of contractual compliances and government statutes.

A survey revealed that 73% of U.K. procurement professionals said their late payment practices have damaged supplier relationships.

The failure to pay a supplier on time can result in late charges if it is a stipulation in the documentation. The worst-case situation is a contract will terminate, and the supplier can bring the buyer to court to dispute damages. In contradiction, if not in the agreement, a supplier will warn the buyer by sending a legal notice to disclose specific details to avoid the termination of a contract.

So, are they inversely proportional? Can an organization strike a balance and retain working capital longer while maintaining smooth relationships with suppliers? Yes, by adequately negotiating contract payment terms with your suppliers, you can strike a proper balance. Negotiating payment terms with vendors is a sensitive process and may take repeated efforts.

Tips for vendor payment negotiation

• If you are worried about suffering from a cash deficit, request your vendor to adjust payment terms in the contract itself to avoid future disputes; if the answer is no, search for another partner supplier that offers payment flexibility.
• Inform a supplier that you are evaluating your options with other suppliers to compel approving exceptions to procurement payment terms.
• Negotiate the ability to pay every quarter if needed. Negotiate terms that will work best for your organization and will create a win-win situation.
• Before negotiating, decide what your organization is compliant to offer and be ready to strategize counteroffers that entail setting up a p-card payment plan with a supplier.
• Request payment dates to be prolonged to 30 or 45 days out to aid with making cash flow fluctuations. Ask if the payment term includes a whole delivery versus partial delivery of goods.
• Hold on sending disputed invoices until the supplier issues a credit note.

One thing you need to be careful of is negotiating with every supplier is not practical. A mere phone call can result in a supplier improving payment terms, saving you time and effort in dealing. It is essential to communicate with stakeholders and determine strategies to remove terms in a contract. It is vital to prepare an escalation plan because some suppliers will reject requests.

However, failure to accurately manage payables makes it harder to forecast and manage cash flows and anticipate short-term liquidity needs, putting many businesses on an unnecessary cash flow tightrope. But technology has moved beyond simply enabling more excellent management of existing contracts in place. Autonomous contracting is an emerging area that can help companies establish their payment-related negotiating objectives and wield automation technology to optimize the negotiating process.

So, how to better negotiate contract payment terms with buyers and suppliers?

Learn more about how negotiating payment terms with vendors can impact cash flow and how best to retain working capital longer in your organizations without putting your company in danger of noncompliance or contract breach or without hampering vendor relationships.

Read More Here: Protect Cashflows by Strategizing Contract Payment Terms