Best practices for vendor terms

Many store owners struggle to manage cash flow, especially as it relates to getting vendor terms on future orders. A great question in our retail community came from a clothing and accessories store owner who said: “I have to place a lot of my orders six to eight months in advance. This ties up so much money and oftentimes I’m left scrambling to pay for it.”

Placing orders months in advance is a reality for many retailers. So how do you know how much you should order in advance? By using an open-to-buy plan. This is crucial — your open-to-buy plan is as close to a crystal ball that you’ll get to make sure you’re not over or under ordering.

Handling vendor terms

Placing orders is not the same as paying for inventory upfront. You should never be in a situation where you’re paying for inventory that hasn’t arrived in your store yet. You should have vendor terms on advance orders.

Ideally, you want to negotiate terms on advance orders with your vendors that allow you to delay payment for at least 30 or 60 days.

"You should never be in a situation where you’re paying for inventory that hasn’t arrived in your store yet. You should have vendor terms on advance orders."

Sometimes, with new vendors, you may need to offer to pay before shipping the first order to establish a good relationship. However, make it clear that moving forward, you require payment terms to ensure smooth cash flow management.

Managing cash flow

Effective cash flow management is the lifeblood of any retail business. If you’re struggling with cash flow issues, focusing on improving your vendor terms over the next year can make a big difference. Negotiating better terms can free up cash and give you more flexibility in managing your inventory and finances effectively.

A note about credit cards

Relying on credit cards to compensate for lack of terms with vendors is generally a bad idea. If you can’t guarantee that you’ll have the funds to pay the balance before the due date, you’ll end up paying steep interest.

If you’re able to use the credit cards to your advantage (collecting points for example), it may make sense to use your credit card as a payment type after securing your vendor terms. This way you extend the terms even longer and use the rewards to invest back into your business or pay for team perks.

Cathy Donovan Wagner guides retailers to grow their sales so they can pay themselves and their staff. Watch how here: www.retailmavens.com/increasesales.