- June 24, 2020
- Posted by: Marisa Palmieri Shugrue
- Category: Accounting Advice
There’s no disputing that “cash is king” and is vital to the financial health of any business.
Having sufficient cash on hand is a key to success for pest control companies, especially during volatile or uncertain times. One way to keep money in the bank longer, says PCO Bookkeepers Managing Partner Brian Post, is to negotiate better terms from vendors and use those terms to extend the time it takes to pay invoices.
“It helps you manage your cash flow better overall,” he says, noting that negotiating better payment terms with suppliers shouldn’t be reserved for a crisis. “It’s important all the time. Instead of just paying your vendors as quickly as possible, you could be doing other things with that cash, like investing it in additional advertising and marketing or making sure your vehicles are all properly maintained.”
Ami Kassar agrees. “I always say you’ve got to be preparing your business for a speed bump,” says the CEO and founder of MultiFunding, a company that helps businesses obtain various types of financing. “Managing your cash flow and working on it all the time is a big deal. The longer you have to pay your payables, the less pressure there is on you. The more terms, the better you are.”
Post and Kassar offer five ideas for pest management professionals interested in how to negotiate payment terms with suppliers.
- Start with your biggest cost centers For pest control companies, the main vendors to approach are your chemical suppliers, Post says. “From a Cost of Goods Sold perspective, those are the majority of your costs.”Some chemical vendors require less established pest management companies to pay invoices to in cash right away, he says. This situation is a disadvantage for the buyer.Paying with a credit card is an additional tactic to create more time on the vendor side of the cash conversion cycle. “Paying with a credit card adds 30 days on your cash going out,” Post says.
Fuel vendors are the second supplier Post prioritizes for pest control operators. “You’ll typically have to make payments every couple weeks, but you could work on extending those to maybe once a month,” he says.
- Ask (and shop) around While your goal should be to get the longest possible terms to pay the invoice – or get a cash discount for paying it early – it’s worth finding out what terms your peers are getting before attempting to negotiate, Kassar says.“Ask some of your friendly competitors,” he says, recommending professionals turn to trade association message boards or in-person conferences to connect with other pest control firms in noncompetitive markets. “What are other people are getting for terms or what terms are competitive in the industry?”If you’re not receiving favorable terms from a vendor, you can always go elsewhere, Post says.
“You could say, I’ve got X terms from A Co. What kind of terms can you provide me at Y Co.?” he says.
- Consider trade offs Prior to negotiating, consider what you could offer the vendor for better terms.“It’s give and take,” Kassar says. “For example, ‘You give me 90 days to pay you, and I’ll give you all my business instead of splitting it with your competitors.’”When it comes to exchanging volume for terms or discounts, Post cautions pest control operators not to over order just for a deal. Idle inventory is its own problem.
Some chemical suppliers offer deals, including terms and discounts, through their early order programs. These offers are worth considering and may also help reduce your tax burden at year end, Post says, especially for larger pest management companies that can ask the supplier to warehouse the product for them and ship it on as-needed basis.
Other vendors may offer prompt payment discounts, such as 2/10 net 30, which means the buyer receives a 2 percent discount if payment is received in 10 days, otherwise the invoice is due within 30 days.
“I highly encourage companies to take those deals,” Post says, urging companies to look at an online calculator to determine the effective interest rate of a prompt payment offer.
For example, the effective interest rate on a 2/10 net 30 offer is 37 percent.
“Even though it goes against the advice of keeping cash as long as possible, the amount of money you’re saving is significant when you take those terms,” he says.
Kassar says it’s essential for businesses to have a line of credit available to capitalize on these discount opportunities.
Referring to the 2/10 net 30 effective interest rate, he says, “If your line of credit costs you 8 percent, you should use that line of credit any day of the week.”
- Build relationships. One you find a supplier you’re happy with, it’s important to forge a mutually beneficial relationship, Post says. These bonds can be formed at the ownership or manager level, depending on each firm’s size.“Personal relationships with the vendor reps are always a good thing to have,” he says, noting it could lead to better terms or pricing down the road. “Negotiating terms is the normal course of business. As you become a bigger player, you can command a little bit more as far as favorable terms go.”