When you place your order for merchandise (inventory) in your store, it will come with specific terms for payment of the invoice. These terms are often referred to as "dating." An invoice will contain the time frame in which you must pay the bill. For example, Net 30 means you have 30 days to pay the bill or 30 days of dating.
Negotiate Favorable Terms with Your Suppliers
The key is to negotiate favorable terms with your suppliers that allow your dating to more closely align with your inventory turnover. For example, if you have an inventory turn of 4.0 (meaning you turn your inventory over completely four times per year) then if you had 90 days dating you would actually not be paying for the merchandise until you sold it.
This is the secret that has traditionally been reserved for large national retailers, but today, even small independent stores can get dating on their purchases. Granted the dating is reflective of sales rate, meaning the more merchandise you buy from a vendor the more likely they are to work with you on the terms. So don't expect every vendor to respond yes when you ask for dating on your purchases.
Another consideration on terms is the % discount you can receive for early payment. For example, if you have an invoice that is 2% Net 30, then this means that you have 30 days to pay and if you pay on time, you can deduct 2% from the cost of the invoice as savings. More likely you will see terms like Net 30, 2% 15 meaning if you wait for 30 days to pay, then you owe the full amount, but if you pay in 15 days, you can deduct the 2%.
Cash Flow Is the Key to Survival in Retail
The key to surviving in retail is cash flow. Too many retailers get burned trying to run their business from the P&L statement. The P&L statement reports what happened during a specific time period. It does not tell you if you can pay for anything. The more time you have to pay an invoice, the better your cash flow. The hardest thing to do is buy a bunch of inventory that has to be paid for before you sell it.
When a vendor offers you a special price to buy more, make sure you also include some dating. It's great that you can save an extra 20% off the cost if you buy 200 versus 100, but if your turn is 2.0, you just created a bill for yourself that is due before you sell it. Think of it this way, it's like buying four cans of ravioli at the grocery store, because the deal was for four cans even though you only eat one can a month. Did you really save money?
Consider Using a Rewards Card to Pay Your Invoices
One other note of advice. Consider using a rewards credit card to pay your invoices. Not only will you get travel or other incentives for free from your credit card company, but you will also get another 30 days of dating. I paid for many of my trips to buying and trade shows with miles and points from my credit cards. Be careful, not all vendors will let you do this.
And some even charge a percentage of the transaction to take a credit card. So you end you up with extra dating, buy give away the incentive to pay early. Do the math and you still may come out ahead. For example, one of my vendors was 5% 15. So I would pay with my credit card on the fifteenth day and then get another 30 days. They charged me 2% to take my card, but I was still ahead.
Be wise with your purchases. Also, consider dating and always try to get more time to pay. One other trick to help with cash flow - try paying your invoices with a credit card that you then pay off at the end of the month. This gives you an additional 30 days to pay. Plus, if you are really smart, you can use a card that gives you points for travel so you can go to the buying show for free!