Vendor Discounts – Are You Taking Full Advantage?

Are you paying too much for materials and supplies? Now is the time to look at taking full advantage of vendor discounts. With interest rates at their lowest in decades, you should be taking all the vendor discounts you can get. In addition, now is a good time to look at your purchase terms and negotiate better ones.

Why your company can benefit
If your company's funds are in a non-interest-bearing account, then discounts should always be taken when funds are available. When the funds would otherwise be earning interest, or when the funds would need to be borrowed, a simple formula can help you determine if a discount is worthwhile:

The computed annual rate can be compared to the interest rate that could be earned if the funds were left in an interest-bearing account, or the interest rate that would have to be paid on borrowed funds.

Example: A typical discount offered by vendors is a 2% discount if paid within 10 days, otherwise pay the full amount in 30 days. This converts to an annual rate of 36.5%. Unless the company can earn an interest rate higher than this elsewhere, the discount should be taken.

Why vendors give discounts
With the current state of the economy, some vendors are having difficulty collecting from their customers. Offering discounts accelerates the collection process, which in turn helps by increasing current cash flow. If your company is one of these vendors, look at the terms you've traditionally offered to customers and see if there is any opportunity to improve cash flow without significantly impacting your bottom line.

How can your company get these discounts?
The first step is to determine which of your vendors represent a significant portion of your annual purchases. Your accounting software should allow you to print a report of annual purchases sorted by vendor. From this report, select your significant vendors and review the terms for each one.

If no discount is offered, contact the vendor and try to negotiate a discount. If you are a customer who consistently pays on time, you will have more bargaining power. You may be able to negotiate directly with the sales personnel, or you may have to work with the sales manager. Keep trying. They may say no, and they just may say yes.

If the vendor already offers a discount you are taking advantage of, try to renegotiate. If you're getting 2%, ask for 3%; if you're getting 3%, ask for 4%.

If the vendor offers a discount you are not taking advantage of, look closely at why the discount is not being taken. There may be a simple alternative that will allow you to take the discount. It would be helpful to examine the following:

• Cash flow: Use your line of credit to pay it earlier and take the discount. Unless you are paying more than the rate of return calculated above, this is one option.
• Invoices received after discount date: Ask for invoices to be faxed or e-mailed to you, instead of waiting for the mail.
• Processing: Remind accounts payable personnel of the importance of taking the discount, and to ensure that payments are made within the discount period.

In short, look at the company's vendor relationships and determine where money could be saved. If these are lean times for your company, they most likely are for some of your vendors. If your company is one of these vendors, look at the possibility to sell more product and improve overall cash flow by offering some of these discounts. A slower economy may mean rethinking how your company does business. Take advantage of the opportunity!

Judy Briggs, CPA
Inventory Group