If you follow us on Social Media, mainly the big three – Facebook, LinkedIn, and Twitter – you recently saw that I referenced #WalMartDilemma and you may have wondered what I meant by that. Since this month’s #BusinessTip is about establishing your business’s credit policies, I think it’s important to note a problem that may arise as you establish these policies.
Every product manufacturer dreams of the day that they get an order from Wal-Mart. All those years of product development, proof of concept, knocking on doors, cold calling and everything else to build their brand and finally, the call of all calls – Wal-Mart wants to place an order. You feel as though you’ve made it. Your product is no long just good; it’s a great product. So great that Wal-Mart wants to occupy VALUABLE shelf space with it!
You ramp up your assembly lines, hire additional shift workers and fulfill their first purchase order (P.O.). You call your bank to get a payoff number for your mortgage; call your realtor to start looking at vacation homes; tell your spouse to start researching new cars. All looking ahead as you rake in the cash from your Wal-Mart deal. The P.O. is fulfilled and the product ships. The following week, you get another great call – Wal-Mart had such great success they want to re-order, but twice as much! You spread the great news to your warehouse manager who, you’d think, would be uber-excited. Then he tells you that you don’t have the inventory to fulfill Wal-Mart’s next, bigger order and you’ve already over extended yourself on your credit terms from YOUR suppliers to satisfy your previous order and, here’s the kicker, the $$ from Wal-Mart, your dream customer, isn’t coming for another 90 DAYS!
That’s right, Wal-Mart tells their suppliers, right off the bat, that their terms are 90-days. If you’re lucky and have been a long-time supplier, you may get down to 30-days but that won’t happen for awhile. So what do you do? On the one hand you can’t afford not to accept the Wal-Mart order; on the other hand you can’t afford to accept the Wal-Mart order.
This shows the importance of credit terms. Hopefully you can get an extension with your suppliers or your credit and relationship is good enough to get a bank loan. Better yet, you’ve been anticipating this day and have enough cash to fulfill the order yourself w/out any outside help. As you can see, as a business grows, their need to examine their credit policies does too.