Most people will ask the waiter in a restaurant to take back a meal if it is inedible or improperly cooked. The same goes for the products or services purchased. If the goods or services do not meet promised standards or are not received on a timely basis, the company's financial department is perfectly within its right to challenge the billing. Do not pay the billing until you are satisfied because you will lose much of your leverage once the vendor receives payment.
Remember, you are the customer and most vendors aim to please their customers. They rely on repeat business and usually will be amenable to reasonable requests for a billing adjustment or substitute products or services. Should a vendor's billing department not agree to an appropriate adjustment or substitution, do not be afraid to communicate your unhappiness with a top official at the vendor's company. If that attempt fails, maintain your negotiating advantage by withholding payment of the bill. Once the vendor's receivable from your company becomes sufficiently overdue, the pressure to settle the dispute will heighten. Unless the billing and the dispute are extremely large, it will not pay for the vendor to begin a collection suit.
Whenever a company contracts with a vendor to perform a large construction assignment and agrees to pay installments on a percentage of completion basis, the financial officer should make sure that the percentage paid does not greatly exceed the work completed. If there are delays in the work, the company should likewise postpone the contracted payments. Should there be an unforeseen bankruptcy, at least the lost monies can be minimized. Also, the greater the percentage that is owed the vendor, the greater the ability to ensure that the contracted work is completed on a timely basis.
Since interest rates are lower now than they have been historically, cash discounts have become more valuable. As the following illustration highlights, it even makes sense to borrow funds to take advantage of a cash discount.
In this example, let us assume a company receives a $100,000 invoice with payment terms of "2 - 10, net 30" (i.e. the debtor has the option to take a 2% discount or $2,000 if payment is made within ten days of the invoice date or to pay the full invoice amount within thirty days). Also, let us assume that the company has no current cash nor will it have the $100,000 until the final invoice due date but it does have a $100,000 bank line of credit with an annual interest rate of 6%.
If the company borrows the $98,000 from the bank on day 10 and repays the loan plus interest on day 30, it will cost $327 in interest. Hence, the financial professional has saved $1,673. Imagine how many thousands of dollars could be saved if this borrowing program were extrapolated to an entire year on all eligible purchases.
Even if a supplier does not offer cash discounts, there is reason to aggressively negotiate a discount. With cash being tight these days, you can tempt a vendor into giving a cash discount by promising to pay immediately for a new purchase. Should the supplier refuse the offer, it is neither illegal nor unethical to stress the fact that the vendor will absolutely never get paid until the due date.
Too many times, managers reorder products or renew service agreements without spending time to evaluate whether the supplier is charging a competitive rate. The excuse offered is always something like "Why rock the boat? I have always been satisfied with the vendor's product or service."
Maintaining continuity of product or service is admirable and usually an attainable goal. However, a conscientious manager keeps the vendor "on his toes." Often vendors will charge their best customers list prices because the user never balks and is unaware that others are paying less for the same product or service.
Periodically, the astute manager will solicit bids from competing vendors and will ask current vendors to meet any lower quotes. It is not uncommon for the current vendor to reduce the price to meet a legitimate quote and keep a valued client.
For example, in my early years as a CFO of a promotional marketing company, the Company's air conditioning maintenance contract was up for renewal. The landlord's suggested vendor offered to continue his services at $3,000 per year. By making a few telephone calls, three bids in the $1,800 per year range were received. Almost immediately after being informed of the discrepancy, the current air-conditioning company not only met the other offers but agreed to guarantee that rate for at least the next three years.
When the incumbent supplier will not meet the lower prices, do not be afraid to switch vendors. Besides reducing costs, you may be pleasantly surprised with the quality of the new supplier.
Especially in this economic environment, a financial manager must be prepared to spend a good deal of time soliciting competitive bids and negotiating in a tough but fair manner with all current suppliers.