All businesses make purchases of one kind or another whether it is food, beverages, kitchen equipment, dining room furniture, etc or simply office supplies. Over-investing in stock is a frequent cause of business failure. If stock ties up large amounts of capital, it means there is less money available to pay creditors, meet operating expenses or for other capital needs. Stock levels that are too high can lead to a cash crisis and liquidity problem.
Negotiating with suppliers
The restaurant and cafe owner is rarely in a strong negotiating position. In overall terms, their purchases are not large and they do not control a significant portion of the market. However, they still do have some negotiating strengths, especially if purchasing from other small businesses.
Obviously, the first issue for negotiation is the price of the goods. But you can effectively lower the overall cost by negotiating on issues surrounding the price such as:
Price terms
Many suppliers use a pricing structure with a series of discounts on a graduated scale. These are not quantity discounts but are based on the supplier allocating a particular classification to the potential buyer, eg franchised representative, manufacturer, wholesaler, local dealer. The price to a particular purchaser will then be based on this classification, not on the size of the order. The implication of this system is to make sure you negotiate the correct classification of your business.
Payment terms
This means the length of time given to pay eg 30 days, 60 days. Extended payment terms may be crucial to your food business’s working capital requirements. Also, consider whether payment must be made net cash or a settlement discount given. Strictly speaking, settlement discounts are not a price reduction at all, but rather an incentive for prompt payment. Nevertheless, since it affects the net price paid the discount is reflected in the profits of your business.
Quantity discounts
Suppliers will sometimes offer lower unit prices on larger quantity orders. They can do this because of economies of volume production and reduction of selling, shipping and clerical costs associated with larger orders. Where the quantity can be used quickly, then quantity buying can be a useful way of reducing unit costs.
Further issues that can be negotiated include:
- Delivery dates
- Terms of delivery (eg payment of freight costs and insurance)
- Flexibility (eg amendments to quantities, dates)
- Quality
- Packaging (eg boxes, pallets)
- Supply of samples
- Inspection and rejection
- Contract conditions and warranties
While not directly affecting the price, these issues are just as important. For example, buying at the lowest price will not help if the quality is not up to standard or delivery is not made on time.
Purchasing and Stock Control
All businesses make purchases of one kind or another whether it is raw materials or simply office supplies. Understand purchasing and stock control – manage this asset and free valuable capital.
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Understand the controls to save time, money and reduce wastage.