Creative contract terms will save you money

Creative contract terms will save you money

A recent article that featured in Ragtrader has emphasised the more subtle savings we can make in contract negotiations.

Generally in negotiations the focus is on the actual price paid.  Too often it can seem that the best way to get a better deal is to reduce the overall price.   However, as the article rightly points out; it is important to consider the several other negotiable factors that will leave you with more cash!

There are several ways that this can be done a couple of examples are:

  • Discount for early payment.
  • Rebates for volume purchased.
  • Contributions towards marketing spend.

The Ragtrader article looks in detail at the discount for early payment which is effectively when you look at the cost of your money and determine that if you are paid earlier and can offer a discount you could be better off!

For example, I purchase merchandise from a vendor for $1,000. The vendor offers terms that the full cost is payable in 30 days from the date of invoice, but includes a 3% discount on the price if the invoice is paid within 10 days (20 days early).  The sacrificed 3% would simply act as interest paid in exchange for being able to use the money for an extra 20 days.

How does this benefit you?  Your savings can be calculated as follows:

THE FORMULA: (Amount Saved/Net Amount Paid) x (365/No of Days Saved)

Amount Saved 3% x $1000 = $30
Net Amount Paid $1,000 – $30 = $970
No. of Days Saved: 30 days -10 days = 20 days

Substituting in the formula, we ascertain the ‘interest paid’ over the 20 days by the vendor (which also represents our saving):

Notably, the article does make a concession that a decision on taking the early payment option would still need to be subject to other considerations- such as cash flow impact and alternative uses for the money. However, this does not detract from its ultimate point that the efficient retailer will be able to negotiate more than just the sale price.

It is important to understand and adopt a number of methods in order to maximise your overall business objectives. For ideas and information on how you negotiate some creativity into your contracts contact Gladwin Legal (ph: 1300 033 934 or email: ).

The full article can be found here:  http://www.ragtrader.com.au/news/negotiating-payment-terms