Aside from offering creative fulfillment, one major appeal of
the retail kitchen and bath industry is the positive cash flow it
Indeed, with payment terms of 50% upon signing an agreement, 40%
upon cabinet delivery and 10% upon substantial completion, bank
balances are usually high, so a well-managed company can exercise
leverage to buy products and equipment at the lowest prices
The following negotiating techniques will enable even smaller
firms to improve their net profits.
A typical vendor in this
industry might offer terms of 2%, 10 days net 30. Because most
dealers don’t realize the value of taking a cash discount,
manufacturers report only a fraction of it, despite building this
percentage into their pricing. Dealers need to look at this
incentive for prompt payment as an investment. In return for
investing your cash for 20 days the difference between the dates
when the full and discounted payments are due the vendor will
permit a 2% savings.
The chart below indicates the way to calculate the annualized
return on this investment:
On the surface, that 2% discount may not seem like much. But when
was the last time you earned a 36% annual return from any
investment? Because small businesses typically can borrow at 5%
today, you must take that cash discount every time to earn that 36%
return. In addition, by paying promptly, you are building stronger
relationships with your suppliers, who will view you as a good
Imagine how much net profit could be earned if all of the
vendors you selected offered this same discount. For an operation
with a $800,000 income and a 36% gross profit margin, your cost of
goods sold would be $512,000. After deducting approximately 13% for
installation labor, material purchases would equal $408,000. The 2%
discount of $8,160 earned through effective cash management could
then fund a nice annual contribution to your retirement
By placing more business with fewer vendors, astute
businesspeople recognize that they can negotiate even better terms.
Ask a vendor what his/her average receivables are in number of
days. Then structure a cash discount request that is a win-win for
For instance, if the vendor says his/her receivables typically
run 28 days, you might ask for terms of 4%, 15 days net 30 in
return for phasing out a competitive line on your showroom floor.
If the vendor wants your business, he/she may agree to letting you
earn that 96% return. Be certain to point out that it can be funded
from the many accounts not taking advantage of the cash discount.
Just make sure that no other dealer is getting better terms before
making a commitment.
It’s a good idea to draft two lists of your vendor cash
discounts. Give one to your bookkeeper with instructions to take
all of these discounts, notifying you when the company’s credit
line may need to be tapped or renegotiated. Then, keep one for
yourself to serve as a reminder of when your firm’s purchase
performance makes it appropriate to negotiate improvements with key
Suppose you are outfitting your office with a new phone system
and your cash position is favorable. You have received three or
four competitive bids and checked out the firms’ reliability and
value through recent customer references. You have negotiated the
lowest price with the most reliable source and learned that the
company’s payment terms are “full amount due upon installation.”
The company’s representative is ready to commit in writing that
installation will be completed in three weeks.
Because cash can trump any deal, ask for a 15% cash discount
(257% ROI) for 100% payment up front. Even if the firm counters
with a 10% discount offer (170% ROI), it is another win-win for
Research has shown that most consumers “buy you,” not a product
brand. Therefore, dealers should be aggressively advertising the
value of their services and company brand in order to sell more of
the product brands displayed in their showrooms.
In the years ahead, investing 3% to 4% of a dealer’s annual
income in this approach is going to be critically important for
even established operations to grow market share as competition
increases from national design chains, as well as from other
All vendors should be asked whether they offer co-op
advertising. Most will admit that few dealers access and use these
funds. Dealers should negotiate alternative uses of this cash, such
as to help pay for your capability brochure, an open house or
photography expenses associated with having a project published in
a national consumer magazine. Better yet, have vendors roll the
percentage available into deeper cash discounts, letting you bank
the extra profits and earn the interest until an intelligent use of
the funds can be determined from having a professional marketing
Many dealers carry too
many cabinet lines. By focusing on only one to cover each of three
key quality grades for your target customers, dealers can negotiate
to earn their displays for free.
First of all, have cabinet vendors understand the extent of your
investment to make their product shine on the showroom floor. There
are host of costs, including installation, countertop, hardware,
plumbing fixture, appliance, lighting, electrical, decorating and
accessory costs not to mention rent and utility expenses for the
square footage the display occupies, and the loss of net profit
from the production time given over to installing it.
Then, structure an arrangement with these select cabinet vendors
that exemplifies a true marketing partnership. Agree on a
reasonable sales target goal as a result of your respective
investments say $100,000 in the first year.
If the cost for a cabinet line is $6,000 after the vendor’s
standard display discount, and you achieve that goal, then nothing
is owed at the end of 12 months. If only 80% is achieved from the
date of substantial display completion, then you owe 20% or
Put everything in writing, including any exclusive marketing
considerations, to eliminate possible misunderstandings.
Regardless of their size, dealers can buy still better by
joining a recognized industry group. Many progressive vendors offer
buying group members deeper up-front discounts of 3% to 10% in
exchange for a greater focus on the sale of their product line.
In addition, members earn volume rebates that they could not
negotiate for themselves, giving them a hefty profitability edge
over their competition.
Consider the aforementioned $800,000 operation with $408,000 in
material purchases. If all of these purchases were from buying
group vendors, the dealer-member would earn approximately 3% more
profit or $12,240 in volume rebates spread over quarterly
Furthermore, buying groups are growing at a rapid rate. What’s
more, as the group’s purchases grow with preferred vendors, the
volume rebate percentages increase, further leveraging each
The bottom line is that dealers who wisely invest these growing
sums of “found money” each quarter into stock mutual funds could
easily find themselves ending up as millionaires within 20 years.
Imagine what you can buy then.