Revisiting Vendor Payment Terms: It's Time!

PurchTips - Edition # 198 February 23, 2010

By Charles Dominick, SPSM

Are Vendor Payment Terms A Hidden Opportunity?

One effect of the recent economic recession is that banks have dramatically curtailed their lending, creating a "credit crisis." Companies who rely on credit in order to operate have seen their cash balances dwindle.

Without cash, many companies have had to dismiss significant portions of their workforces and curtail operations. These companies may have included several of your vendors or even your own organization.

Many buying organizations facing a lack of cash and restricted access to credit have chosen to unilaterally extend their payment terms with their vendors, commonly transitioning from payment within 30 days to payment within 60, or even 90, days. While this might be a smart move for companies that face a "preserve cash or die" situation, it is a strategy that could not come at a worse time for many of their cash-strapped vendors.

With banks not lending and customers not paying promptly, some of your vendors may run out of cash and become insolvent. So, extending payment terms as a cash flow solution may cause the even more costly problem of having key vendors driven out of business.

As such, only unilaterally extend payment terms if your organization is in a desperate cash situation and only for vendors strong enough to sustain the change. If your organization has a healthy cash balance, consider taking the opposite approach: shortening your payment terms.

Today, vendors are desperate for cash. After all, the banks won't lend them cash and their other customers aren't paying them for a long time.

By being willing to shorten your payment terms, you put yourself in a strong position to negotiate a 1 - 2% early payment discount. That can save your organization significant money. And reduced spend may be more attractive to your CFO than improved cash flow!

My advice: collaborate with your finance department to determine whether cash preservation or expense reduction is a higher priority. Then, implement a new approach to vendor payment terms that keeps vendor solvency in mind. This is a rare opportunity!

(keep reading for a FREE Offer)

Spotlight On Professional Development Opportunities

Purchasing Magazine's annual salary survey revealed that, on average, purchasing professionals with the SPSM^® Certification, available exclusively through  Next Level Purchasing, earn $10,992 (US) more per year than purchasers who do not have a certification. The cost to earn the SPSM^® Certification is only  $1,149 (US), making it a "no brainer" that earning the SPSM® Certification is worthwhile .

If you have not yet earned your SPSM^® Certification, why not? If you want 2010 to be a year  of achievement instead of excuses and want to give your earning power the same boost that other purchasing professionals have, learn how to earn your SPSM^® Certification  at:

www.NextLevelPurchasing.com

The Latest Purchasing News

• Purchasing Managers/Directors: Are you struggling to develop a plan for improving your team's performance? If so, visit: www.NextLevelPurchasing.com/benchmark
• Discuss today's topic on our LinkedIn SPSM Group! Visit www.tinyurl.com/7lmbzy
• Not a member of the LinkedIn SPSM Group? Learn how to join at: www.tinyurl.com/8tgfnd
• Considering a career move? Browse jobs preferring candidates with the SPSM^® Certification  at: www.NextLevelPurchasing.com/jobs

FREE Offer!!!

There are four irreversible business and technology trends that are likely to cost purchasers like you their jobs in the next 12 months. Do you know what they are? Do you know how to protect yourself from their effects? If not, you should get your FREE report entitled "Career Survival In Supply Management."

"Career Survival In Supply Management" gives you a seven-step process to stay in the game!

Copyright 2010. This article is the property of Next Level Purchasing and may not be copied or republished in any form without the express written consent of Next Level Purchasing. Click here to request republishing permission.