Once you start your business, especially after you sell your products so successfully. You will quickly realize that you need continued cash flow to sustain your sales. In this article, I will introduce what factors determine your cash outflow on the sourcing side and how to negotiate with your Chinese supplier for better cash management.
What Determines Your Cash Outflow?
On the sourcing side, the most important factors that determine your cash ourflow are lead time and payment term.
Here lead time can also be considered as dead time. Because the lead time is a period of waiting time from the time you place your purchase order to the time when the product is available for you to sell and convert the product to cash. During this period, nothing could happen to your cash but wait, especially when you have prepaid for your products.
How Does It Affect?
The long lead time has a killing effect on your cash flow. During the waiting period, you have all cash tied up and there is nothing you can do about it but wait. The longer you have to wait, the more pressure on your cash flow. Apart from that, longer lead time will affect your inventory forecast. During the long lead time, you may feel panic and worry about running out of stock, which would cause you to order too many.
When and how to pay your supplier can also determine your cash outflow. The longer the payment term you can get from your Chinese supplier, the more cash you can save because you can delay your payment, which can greatly relieve your cash pressure.
How Does It Affect?
Let me explain it by an ideal example. If the lead time is one day and the payment day negotiated in the payment term is 15 days, then you can take advantage of the time gap and do business without using your own money. Because the supplier can produce it in one day and you can sell it in a day or two weeks, and you don’t even have to pay the supplier in 15 days. Of course, this example is just for better understanding the important impact of payment term on cash flow.
Tips for Negotiating with Your Chinese Supplier
If you want to negotiate for a better lead time and payment term, following are some tips for you.
Know the Peak and Low Season of Your Supplier
When negotiating lead time with your supplier, you need to know their peak and off-season in advance. If it is in peak season and the supplier has a lot of orders, the lead time will be longer and the price may be higher. Therefore, it is recommended that you’d better place the order and negotiate with suppliers during the off-season, which will shorten the production cycle and make it easier for you to get a better price.
Accept A Higer Price for A Better Payment Term
At present, in order to protect their own interests, many suppliers choose 30% deposit and pay the remaining 70% after shipment. If you have a good market for your product but you don’t have enough cash flow, you can appropriately accept a slightly higher price to get better payment terms such as 30% before production , 50% after shipment, and 20% 60 days after delivery in your warehouse. This can also alleviate the cash pressure appropriately.
Small Factories May Be More Suitable
The larger factories have more bargaining power simply because they have enough customers to stay in business. Smaller factories may not have enough orders and are more likely to accept riskier payment terms, in which case orders may be more important than profits, such as accepting very small deposits.
Sign A Clear Contact
There are many payment methods for you to choose from. You need to choose a better one according to your own situation. If you want to know more about payment methods, you can read this article:https://sinoinspection.com/an-analysis-on-the-payment-methods-when-importing-from-china/. Payment terms, lead time and so on should all be clearly stated in the contract both in English and Chinese. And this is an important basis for resolving conflicts in the future.
Managing your cash flow better will keep your business running smoothly over time. If you still want to know more about doing business in China, you can contact us for help.