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When it comes to selling stuff locally, the retailer is worth keeping around, so can we please stop pretending that net 30 terms work?
Traditionally, retailers pay cash for big margin accessories and you pay over time for lower margin, big ticket items. The typical term is “net 30.” In reality, it’s more like net 22, as it can take up to eight days to receive your inventory from the vendor. It’s almost never possible to pay the invoice with the same inventory (insert the “rob Peter to pay Paul” adage here) – meaning that invoices are paid with the prior profits of other vendors.
This dynamic is not pretty, and is the reason why I have more grey hairs than I should! Balancing cash-flow with impossible inventory repayment schedules is a difficult circus act that keeps the heavy inventoried businesses flourishing. Bruised egos, strained vendor relationships, and emotional scars mount up as retailers have to figure out how to fill their store whilst paying their bills on time. I deeply dislike not paying every vendor on time, but the simple fact is: It cannot be helped.
Of course the problem is obvious: What strategy does the retailer use to decide who gets paid first? My strategy is to create three groups.
Critically important vendors
Vendors who can wait 45 days without squealing
Mature vendors who can handle 45-80 days without an issue
It might surprise you, but groups 1 and 3 get most of my business! Group 2 vendors are often run by sheltered accountants and bean-counters, who have the power to overrule their sales teams. Group 2 vendors are constantly being re-organized, experience high turnovers, and sell with mediocrity on the showroom floor. I can tell when a vendor is likely to fail when the accountants make sales decisions!
Over 10 years, I have come to learn every strategy in the book for prolonging payment in order to survive. Instead of continuing to quietly operate this way, I wanted to take a moment and share this problem because I know many other retailers are suffering the same thing, and some of their strategies to prolong bill payment are a lot rougher than mine! My brothers and I suffer tremendously to pay these bills as current as we can, often delaying our own paychecks to do so.
The solution is for vendors to re-evaluate who they want selling their product. If you are too small to handle a few months delay on payment, then maybe you shouldn’t be dealing with retailers. Maybe you are better off selling direct online and dealing with the headaches that retailers traditionally handle for you – customer service, returns, et cetera.
The solution for vendors that want to sell more product is to abandon net 30 in favor of an inventory cap program. Figure out how much inventory a store in a region should carry and simply sell them that amount, with expectations that payment will happen organically as the inventory sells. If your inventory actually moves, then the retailer will order more.
If your inventory is hot, then watch the retailer treat you as a “critical account.” I’m not talking about “flooring” with the predatory fees – I’m talking about selling large amounts of inventory to stores that can resell it and pay you over the following months. Ironically, this transition would result in more well-stocked stores, stronger vendor-retailer relationships, and a competitive advantage that the internet “pajama warriors” simply couldn’t compete against.
You can’t save the world if you can’t pay the rent. Let’s see some vendors abandon net 30 in favor of realistic terms.
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