By Clive Birnie | May 12, 2019
Originally published by Clive Birnie on the Positive Churn Blog, 1st July 2007
I am constantly astonished at how little attention payment terms get in negotiations. Terms can be as important as price. A good balance between the two being the ideal.
If it will get me the cash earlier I may be prepared to compromise on price.
If the prospect is unyielding in their corporate policy of stupendously long terms then I am unlikely to offer my best price. Or maybe decline to offer any price at all.
Such is life.
I am fortunate that I was introduced to the importance of trading terms within weeks of taking up my first position back in 1989. As I was working for an export company the training session was titled “An Introduction to Export”. Rather than focusing on logistics however the chap at the helm for the day fixed our minds on the terms of trade and useful stuff such as INCOTERMS.
He started by asking us what term we thought was the most secure. A few minutes of conference produced the reply “A Letter of Credit”.
He snorted with amusement. “That is what everyone says and they are all wrong.”
He scanned our faces for a hint of the correct answer. None came.
“Cash in Advance!” He roared. “Cash in Advance. What can be better than getting your cash before you even ship the goods!”
Of course most of us will find ourselves offering credit terms most of the time. So it is important to get the right terms for your business.
A simple rule: If you offer terms longer than your average creditor terms you are going to suck cash out of your business.
Back in the dread days of 2003-04 when we were forging Severn Delta in the post receivership fire I re-negotiated shorter terms with a number of supportive customers because as you would expect our suppliers were offering rather limited lines of credit at the time.
The one customer who refused to work with us and in fact forced longer terms on us was managed out. The fact that they were our biggest customer in our first year made the decision emotionally hard but a practical necessity as I have described before.
Getting the length of terms right is crucial. Keep your debtor days longer than creditor days and cash is under your control, and that is something worth trading on price to achieve.
© Clive Birnie, 2007 - published with permission