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Most store owners struggle with the question of inventory size. No one wants to run the risk of carrying too little inventory, but at the same time, too much inventory can tie up valuable cash. And the question, of course, becomes even more complicated in a down economy.
For store owners worried whether they can carry a sufficiently large inventory in this economy, improved cash flow management can help make it easier to stock what they need without coming up short at the end of the month.
Many small-business owners turn to the classic tool of trade terms to improve their cash flow. That said, at least as many small-business owners fail to take advantage of this resource, either because they are unfamiliar with the advantages of trade terms or because they feel this tool is not available to them.
If you are a convenience store owner in the latter category, you must make sure you're taking advantage of this valuable cash flow management tool by understanding the essentials of how trade terms work, how they can be used to even out cash flow, and what can be done to gain access to trade terms, or similar tools. The following provides the basics of trade terms along with tips on how you can put them to work for your business.
Know the Basics
The idea behind trade terms is simple: a company and its suppliers agree on the timing of payments and how much is due at a given date, such as payment in full in 30 days. To encourage early payment, however, suppliers may include an incentive of 1 percent or 2 percent for customers who pay within 10 days. When your business has cash and can make early payments, earning a discount is a great option that puts your cash to work. In a slow economy when profits are slim, discounts like this are a valuable tool for boosting margins. Consider it the equivalent of adding 1 percent or 2 percent to your markup.
There are, of course, times when early payment isn't an option. To help customers deal with tight cash flow, some vendors offer trade terms that will permit you to take the goods and delay payment. Under these terms, customers agree to make a designated partial payment and then defer full payment for a specified term, such as for an additional 30 days.
Actively Pursue Trade Terms
Approach vendors to negotiate more favorable terms, but keep in mind that some simply don't offer them, and it may take time to convince a vendor. Because trade terms are about trust and creditworthiness, you can expect the most from companies with which you have the longest and best relationships. When you're not successful in gaining trade terms, look at what makes your best customers valuable to you and use that knowledge to make yourself more attractive to vendors. Volume and regularity of business are both important factors. Consider consolidating business with one vendor, for example, or look at formalizing a standing order with a particular vendor instead of ordering sporadically.
Of course, there will always be vendors that don't offer trade terms, as well as expenses that will never qualify, such as utilities. In these cases, look for other ways you can improve cash flow. Using credit cards that offer cash back or other rewards is one way of earning a discount; another possibility is to use cards that offer trade-like terms. In addition, you can look for other non-cash payment methods such as bartering. And if you’re already using credit cards, make sure you're actually utilizing all the rewards you earn to your best advantage. While seemingly modest, all of these techniques can go a long way.
Keep Credit Records in Order
Whether you already receive trade terms or hope to qualify in the future, it is important to establish and keep a strong credit record. Make it easy for vendors and credit issuers to confirm that you’re an established business by registering with commercial credit bureaus, such as Dun & Bradstreet and the Small Business Financial Exchange.
You'll also want to make certain that the credit records in your file are up to date and accurate. Contact credit bureaus to verify the information in your credit report and check your company profile for errors. If you do find mistakes or irregularities, be sure to address them immediately to maintain good standing.
Inventory and cash flow will always be challenging for store owners, but the right tools can make all the difference between having cash on hand and coming up short at the end of the month. And while cash flow is especially tricky in a down economy, keep in mind that every trick and technique you learn now will serve you in the future.
When the economy does eventually bounce back, improved cash flow should help put you in a much stronger position to take advantage of all that a recovery will bring.
Marcy Shinder is vice president of American Express OPEN Charge Card, the nation's leading issuer of card products for small-business owners.
Editor's Note: The opinions expressed in this column are the author's, and do not necessarily reflect the views of Convenience Store News.