April 12, 2017
Lowest Price Versus Dated Terms — Which is the Better Choice?
Manufacturers and distributors in the shooting industry are notable for their use of extended payment terms, aka “dating” or “dated” terms. Are they a good deal for retailers or an accident waiting to happen?
With typical dating terms (this is the language of the industry), a vendor will present a payment choice to the retailer along the lines of pay “3%/10 days or net 30 days.” If you pay in 10 days, you are three percent richer, but if you pay in 30 days — the net (not dating) terms — you have a chance to sell a portion of the inventory before it’s paid for.
In the shooting industry, there is an endless array of such terms offered either through distributors or direct from the manufacturers or importers. Some terms are “net,” the total invoice due by XX date without cash discount while others will provide substantial cash discounts such as that three percent discount if the invoice is paid within 10 days. In another example, one typically used for long guns associated with hunting, terms such as “order by April 1/ship as ready/pay 2% October 10” are common.
Term choices can all have their benefits, but when it comes to your bottom line, what’s more important, the lowest price for the product or extended payment terms?
There are some perceived advantages to the dating terms. As I pointed out, you could sell some of the merchandise before payment is due and therefore work on the vendor’s money. With this approach, cash flow (which we talked about in a previous post) might improve because you are collecting (and retaining) cash without yet having to pay for the inventory. Second, you would own inventory that might be difficult to obtain during its preferred season. Finally, the store will look full without any real investment on your part.
What’s wrong with the net picture? Virtually everything.
Dated payment terms look good in that light, but in my experience, it is almost always better to buy at the lowest price possible and forgo extended payment terms. The premise that dating is the greatest inventory and cash management tool is loaded with myth, hidden costs, cash flow impediments and potential risks. Let’s take a look at the real story.
First and foremost, when you place and take delivery of large dated orders to fill your future inventory needs, you are guessing as to what and how much will sell. Even though your forecasts may be based upon historical data, future sales are affected by weather, trends, advertising, competition, economic conditions and the consumers’ needs and desires. Good luck forecasting all of that accurately.
Now, consider that with dating (with or without discounts) terms you actually own all your “dated inventory,” and that means you have lost your ability to respond to changing market conditions. You are locked in and cannot readily change models, colors, sizes or vendors. Moreover, you are hampered in your ability to take advantage of opportunistic buys, since you already own inventory at higher prices. For example, you might not be able to buy a really good closeout or special offering because you own inventory bought on dating.
What this means is that you as a retailer will be exchanging a liability of fixed value (a payable) for an asset of floating value (the inventory). Since the value of inventory typically diminishes with time and exposure to the public, the value of some of your purchases may ultimately be worth less than the value of your payable.
You must consider, too, that there are carrying costs associated with inventory, even good inventory. These costs include interest or opportunity costs, warehousing, insurance, handling, obsolescence and shrinkage. And sooner or later, the big dated invoices come due and payment is expected regardless your cash position.
Buying on a 10-day basis with a cash discount relative to the current and near-term forecasted sales curve is a much better option. (Alternately, a series of scheduled orders with future deliveries subject to modification and/or cancellation can optimize the same benefits.) This keeps you nimble and able to adjust to consumer preferences. Hand-to-mouth buying will also keep you liquid, and you’ll experience less-costly markdowns.
By now it should be clear that taking advantage of cash discount early pay terms is usually a smarter business decision. Still, it’s not a hard-and-fast rule; there are times when it is right to take advantage of dated net terms. These include:
- Dealing with a “no option” vendor who says it’s terms XYZ or nothing
- For allocated or extremely hard to get merchandise
- When you can bring in what you need, when you want it, and in accordance with your company’s inventory turn goal. For example, if you want four turns and would normally buy a three-months supply (12 months/four turns = three-month supply), then take the dating.
With vendors who push for dating, I recommend you ask for reduced pricing — known as “taking anticipation” — in lieu of taking the dating. With this approach, you’ll order as needed or place scheduled orders and pay for shipments on a net basis. Remember, dating is not free. The cost of such programs is built into the prices being quoted.
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Robbie Brown has an extensive background in retailing, wholesaling, distribution service industries and consulting. He has been CEO of numerous companies in the shooting sports industry, including several retail chains and distribution companies. Brown consults for businesses of all sizes in both the merchandise and service industries, as well as for a variety of corporations, industry groups and trade associations. He is a frequent round-table moderator and speaker before industry trade shows, conventions and other corporate groups, and he has published more than 300 business-related articles in various trade magazines, delivered hundreds of speeches and served as a business advisor to many CEOs both inside and outside of the firearms industry.