Aside from offering creative fulfillment, one major appeal of the retail kitchen and bath industry is the positive cash flow it generates.
Indeed, with payment terms of 50% upon signing an agreement, 40% upon cabinet delivery and 10% upon substantial completion, bank balances are usually high, so a well-managed company can exercise leverage to buy products and equipment at the lowest prices possible.
The following negotiating techniques will enable even smaller
firms to improve their net profits.
A typical vendor in this industry might offer terms of 2%, 10 days net 30. Because most dealers don't realize the value of taking a cash discount, manufacturers report only a fraction of it, despite building this percentage into their pricing. Dealers need to look at this incentive for prompt payment as an investment. In return for investing your cash for 20 days the difference between the dates when the full and discounted payments are due the vendor will permit a 2% savings.
The chart below indicates the way to calculate the annualized
return on this investment:
On the surface, that 2% discount may not seem like much. But when was the last time you earned a 36% annual return from any investment? Because small businesses typically can borrow at 5% today, you must take that cash discount every time to earn that 36% return. In addition, by paying promptly, you are building stronger relationships with your suppliers, who will view you as a good businessperson.
Imagine how much net profit could be earned if all of the vendors you selected offered this same discount. For an operation with a $800,000 income and a 36% gross profit margin, your cost of goods sold would be $512,000. After deducting approximately 13% for installation labor, material purchases would equal $408,000. The 2% discount of $8,160 earned through effective cash management could then fund a nice annual contribution to your retirement account.
By placing more business with fewer vendors, astute businesspeople recognize that they can negotiate even better terms. Ask a vendor what his/her average receivables are in number of days. Then structure a cash discount request that is a win-win for both parties.
For instance, if the vendor says his/her receivables typically run 28 days, you might ask for terms of 4%, 15 days net 30 in return for phasing out a competitive line on your showroom floor. If the vendor wants your business, he/she may agree to letting you earn that 96% return. Be certain to point out that it can be funded from the many accounts not taking advantage of the cash discount. Just make sure that no other dealer is getting better terms before making a commitment.
It's a good idea to draft two lists of your vendor cash discounts. Give one to your bookkeeper with instructions to take all of these discounts, notifying you when the company's credit line may need to be tapped or renegotiated. Then, keep one for yourself to serve as a reminder of when your firm's purchase performance makes it appropriate to negotiate improvements with key vendors.
Suppose you are outfitting your office with a new phone system and your cash position is favorable. You have received three or four competitive bids and checked out the firms' reliability and value through recent customer references. You have negotiated the lowest price with the most reliable source and learned that the company's payment terms are "full amount due upon installation." The company's representative is ready to commit in writing that installation will be completed in three weeks.
Because cash can trump any deal, ask for a 15% cash discount (257% ROI) for 100% payment up front. Even if the firm counters with a 10% discount offer (170% ROI), it is another win-win for both parties.
Research has shown that most consumers "buy you," not a product brand. Therefore, dealers should be aggressively advertising the value of their services and company brand in order to sell more of the product brands displayed in their showrooms.
In the years ahead, investing 3% to 4% of a dealer's annual income in this approach is going to be critically important for even established operations to grow market share as competition increases from national design chains, as well as from other well-financed start-ups.
All vendors should be asked whether they offer co-op
advertising. Most will admit that few dealers access and use these
funds. Dealers should negotiate alternative uses of this cash, such
as to help pay for your capability brochure, an open house or
photography expenses associated with having a project published in
a national consumer magazine. Better yet, have vendors roll the
percentage available into deeper cash discounts, letting you bank
the extra profits and earn the interest until an intelligent use of
the funds can be determined from having a professional marketing
Many dealers carry too many cabinet lines. By focusing on only one to cover each of three key quality grades for your target customers, dealers can negotiate to earn their displays for free.
First of all, have cabinet vendors understand the extent of your
investment to make their product shine on the showroom floor. There
are host of costs, including installation, countertop, hardware,
plumbing fixture, appliance, lighting, electrical, decorating and
accessory costs not to mention rent and utility expenses for the
square footage the display occupies, and the loss of net profit
from the production time given over to installing it.
Then, structure an arrangement with these select cabinet vendors that exemplifies a true marketing partnership. Agree on a reasonable sales target goal as a result of your respective investments say $100,000 in the first year.
If the cost for a cabinet line is $6,000 after the vendor's standard display discount, and you achieve that goal, then nothing is owed at the end of 12 months. If only 80% is achieved from the date of substantial display completion, then you owe 20% or $1,200.
Put everything in writing, including any exclusive marketing considerations, to eliminate possible misunderstandings.
Regardless of their size, dealers can buy still better by joining a recognized industry group. Many progressive vendors offer buying group members deeper up-front discounts of 3% to 10% in exchange for a greater focus on the sale of their product line.
In addition, members earn volume rebates that they could not negotiate for themselves, giving them a hefty profitability edge over their competition.
Consider the aforementioned $800,000 operation with $408,000 in
material purchases. If all of these purchases were from buying
group vendors, the dealer-member would earn approximately 3% more
profit or $12,240 in volume rebates spread over quarterly
Furthermore, buying groups are growing at a rapid rate. What's more, as the group's purchases grow with preferred vendors, the volume rebate percentages increase, further leveraging each member's position.
The bottom line is that dealers who wisely invest these growing sums of "found money" each quarter into stock mutual funds could easily find themselves ending up as millionaires within 20 years. Imagine what you can buy then.