Captain Cakes is the premier dessert bar service provider for birthday and anniversary parties in the tristate area. They offer a variety of premium dessert bars, from build-your-own sundaes and decorate-your-own mini cakes, to gourmet fondue and international specialities.
Captain Cakes buys their main supplies locally, but there are many supplies – such as serving dishes, utensils and specialty toppings – sourced from overseas that have skyrocketed in price since new tariffs took effect. While business is busy, these tariffs are squeezing the company pocketbook and the owner, Roger, is trying to reduce costs. Profits are melting away quickly, so he reaches out to his Fractional CFO for help. She recommends negotiating contracts with vendors as a great place to begin looking for cost savings.
If you are feeling that your business wallet is a bit tighter than it should be (for whatever reason), negotiating contracts is one way to save money. It’s important to be watchful and intentional throughout the process. I’d love to serve as your price-reduction dessert connoisseur, giving you lots of cost cutting options to taste and helping you dish up the one that is the best for your business (and palette!). Schedule a call with me today to start sampling a few price reduction flavors!
And if you think you are a bad negotiator…you’re not alone! I’ve found ways to find cost reductions through vendor negotiations that don’t feel uncomfortable or forceful. We can work through the process together.
What are some negotiation tips for vendor contracts?
If you are wondering how to negotiate contracts with vendors, here are the best tips to get started:
Review your contract terms for hidden fees.
Before you sign any contract for new work, be totally clear on fees and look for tiny fine print…
in tiny gray letters on white paper on the very back page.
(Wait, can you read that? Where are my glasses? It’s hard on old people like me!)
The point is, you don’t want to be caught off guard.
If everything you read is too good to be true, it probably is. If it’s not clear how the vendor makes money, ask them flat out: “This doesn’t seem like you are making money from me, so how do you make money?”
Insurance brokers are a great example of potentially mixed loyalties. You work with one broker and they work with a bunch of companies to offer a price. They then present you with options. But brokers are often paid by commission through the insurance companies. Which means…drumroll please…the cost is wrapped up in your quote or is being paid on the back end by the insurance company – it’s just not separately stated.
Consider volume discounts and bulk purchasing.
A great vendor negotiation process involves short and long term strategy. With this perspective, you can buy a lot of something (such as tangible items or intangible service offerings) in advance to receive a discount.
This tip comes with a major caveat, however: you have to be careful to not tie up too much of your cash in inventory and prepaid expenses. If you use up too much cash to get a lower price, then you aren’t left with enough cash to do payroll, pay electric bills, cover overhead costs, etc.
Don’t get caught up in a per item price if your cash flow can’t support the extended total price. For example: Captain Cakes offers a package to customers that includes a large, gorgeous dessert table centerpiece that serves as a memento for a special occasion. Roger outsources these items and the vendor’s current pricing is: 100 – $100/item; 500 – $90/item. 1000; $70/item.
Roger could save $30/item if he buys 1000 instead of 100, which would be huge for his bottom line. But the problem is it’s $70,000 that Captain Cakes would have to pay upfront… and that takes time to sell. Yes, that cash will slowly trickle back in, but if he only has $100,000 in cash to operate the business, and payroll is $7,000 every two weeks, he left himself with only 2 months of cash to operate (and that’s not even considering other operating expenses).
Cash flow problems can cause companies to go bankrupt, so don’t grow too fast and put yourself out of business! The cash crunch isn’t worth it. I’ve seen it too many times to count: the business ends up discounting the item to sell it quickly and get cash back, removing the benefit of the discount received in the first place (or worse, losing money on the purchase at the end of the day!).
Want to know exactly how much you can actually afford to buy in advance to get a discount? I can help!
Time your negotiations during low-demand periods.
Companies with seasonal items and sales have a great advantage here. For Captain Cakes, the demand for ice cream is much less in the winter when everyone wants hot cocoa and molten lava cakes to warm them up. The owner has the space to sit on inventory he buys early (and the cash to pay for it since he understands great cash flow management principles from his Fractional CFO), so he decides to negotiate a lower price with the local ice creamery in January, when they are also feeling a seasonal slump in business. This is a win-win for both of them! He receives a lower price, and the local ice creamery is gaining business during their off season.
Compare multiple vendor quotes.
If you are looking to purchase a new service or want to change vendors or providers, get more than one quote before you decide, especially if this vendor partnership will be a longer term relationship.
But know that the lowest price may not always be the best option if it means lower quality. Depending on what you are buying and how it’s being used, do you want higher quality or lower cost? Maybe you can’t sacrifice quality so you are willing to pay a higher price because you know your customers will also pay a higher price. There are many options and angles to consider here.
Pro tip: Have you heard of the Price, Time, Quality triangle? Price, Time, and Quality all sit at a corner of the triangle. You need to find the right balance between these three things, as it’s impossible to achieve all three at once without taking away from one of the others. For example, you can’t have a low price with high quality. (That’s why last minute plane tickets are so expensive! You are choosing quick, quality travel and so the price goes up.)
Establish long-term vendor relationships.
When you are a consistent customer with a vendor, you will have a better experience and potentially better pricing as you bring them more business over time. This isn’t a negotiation tactic, per se, but it might help you get to a better price over time.
However, the risk with this option is that you are putting all of your desserts in one basket. If they go under, have a turnover problem, or begin having issues delivering on time, you are in trouble.
It’s important that you understand what accountants call concentration risk. If you rely on a vendor for more than 10% of your supplies, you have concentration risk. This is literally noteworthy, as it has to be disclosed on audited financial statements. By depending on a vendor for more than 10%, you assume they are running their business well. And if they aren’t (I bet they didn’t use me to help them put their finances in order!), you are taking a huge risk which could significantly affect your company in the future.
For some small businesses, it is hard to get down to 10%. Best practice is to always have a backup and occasionally buy from them so you can quickly switch your business if you really need to.
Do you need a vendor negotiation partner?
If you are in need of reducing costs due to inflation, an unexpected crisis, a short cash runway, or [insert your current reason here!], I’d love to dive into your business situation and present you with the best options. Vendor negotiation is just one of many ways you can reduce costs to bolster your business’ financial health. Schedule a call with me today and let’s chat about how I can support you.
