Finance News & Insights

Make vendor contracts work for you: 5 ways

Cash Flow

Negotiation is a tactic every Finance chief employs. But renegotiation may be the key to real savings.

The latest trend for small businesses: reevaluating longstanding contracts with vendors, suppliers and landlords to come up with more cost-effective options. Suppliers are proving surprisingly willing to work with their customers.

Fifteen percent of small-business owners and managers have renegotiated long-term fixed-cost supply contracts recently, according to a study by the Small Business Research Board.

Even if you think your contract’s terms are iron-clad, it may be worthwhile to check with your business associates for any wiggle room. Why? Unless you signed your agreement a few months ago, times have changed drastically. Chances are suppliers and vendors don’t have new business knocking down their doors, and they’ll do all that they can to keep their current customers.

Of course, there are a few things you can do to help your cause including:

Come prepared. If you want vendors or suppliers to take your request seriously, it’s important to do some homework. Show up with relevant market data and be able to quantify any price reductions you’re seeking. The more specific the data, the better — it shows you’ve thoroughly analyzed the situation, and you’re not just desperately crying for help.

Stress the long-term. Suppliers and vendors will probably be skeptical about any changes that mean less cash coming in up front — and justifiably so. Stress the fact that you’re here for the long haul, that renegotiating current agreements is a strategy to ensure a long-term relationship, not just a cost-cutter.
If you’ve been loyal to certain vendors or suppliers, you should be in a strong position to renegotiate. One CA company talked to its vendors with the goal of getting a 10-15% price cut. It stressed the fact that it always rolled with price increases during up cycles. The result: About 30 vendors agreed to either a discount or to new terms, resulting in nearly $500,000 in savings — 15% of total operating costs.

Pay faster. Businesses are more likely to alter your arrangements if you’ve consistently proven you can pay on time or, even better, ahead of time.
One IL small business consultant reported that 10 of his clients have negotiated discounts recently — ranging from 1% to 5% with at least one vendor — for paying within 10 days of a product or service’s delivery.

Innovative terms. Renegotiation doesn’t have to be limited to rates and payment schedules. Discounted or free shipping or other perks are just a few of the areas you can look to save. Here’s an extreme example of innovation: Facing layoffs, one company went completely outside the box. The Atlanta-based company approached a major supplier with an unusual request: If the supplier would put four of the customer’s employees on its payroll, then it would become the company’s only supplier.
Payoff: The Atlanta company cut over $250,000 in payroll and benefits costs, and the supplier now stands to gain $1 million in business from the company.

Play up the tough times. Of course, many companies are having trouble paying at all — let alone on time or early. If payments keep getting pushed back by a little bit more each month, you may find vendors more open to alternative arrangements. See if a smaller monthly payment can be worked out — vendors really don’t want to write off your entire balance, so they may be willing to accept smaller payments until things improve.

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