It is tough being a small company or start-up. You have perpetual cash flow concerns and maintaining a big enough plug of working capital is always difficult. Add to this the fact that larger companies tend not to take you seriously on either the buy or sell side.
Selling to a company that is much larger is often challenging. They are often skeptical of your ability to deliver; they want to throw their weight around by dumping outrageous terms and conditions on the table; and they may want you to “invest in the relationship” with freebies like holding inventory, unpaid R&D, free R&D samples, or a dozen other things.
One of the common purchasing tricks is to ask for wide range of volume pricing. That is, ask for the pricing of 1, 10, 100, and 1000 kg of a product. What they will do is to look at the largest volume price as a sort of floor or asymptote price and then begin to ask for lower quantities at that price. They know that you can offer the material at the low unit price one way or another, so why not ask for smaller quantities there as well? This can be a very effective leverage when negotiating price with a vendor, that is, the knowledge of their fall-back pricing.
As the manufacturer you are well aware that the economy of scale only works if you actually manufacture at scale. Many manufacturers of specialty chemicals may not actually keep certain products in inventory. If their sales history is spotty or if it is relatively obscure, there is no way to predict demand. So, dumping capital into finished goods that sell poorly is a bad decision most of the time. When you do not carry a product in inventory, that is, you only make it on demand, your hands are tied in price negotiations. You just can’t rationally offer 10 kg at 1000 kg pricing.
Another difficulty is invoicing. It is almost always the case that the vendor will have to pay for raw material in advance, hopefully with commercial credit terms like 30 days net. And no matter what, payroll has to be met. So the manufacturer has to commit resources up front for a given sale. Only when the product goes on the truck can the vendor issue an invoice. This is all reasonable and expected.
It is possible to go to your banker with a purchase order in hand and apply for a short term loan to fund the manufacturing costs. It is important to get to know your banker well. If they have confidence in you they can help you out during tough times.
Typically, payment is due 30 days after the product ships. Some companies will insist on starting the clock when the shipment arrives. For shipments in the states, this isn’t such a problem. But for shipments involving boats it can present cash flow problems given the month-long transit time. Incidentally, companies that use the SAP accounting system will have requirements that will be as fixed and unchangeable as the very ground you stand on.
It will usually transpire that the manufacturer will have to pay for raw materials and payroll well in advance of payment. This is normal. One of the ways you get into trouble is when raw mats show up too early or too late. Raw mats that show up too early will require payment sooner and raw mats that show up too late will delay manufacture. Timing is important.
Another kind of financial trouble you can encounter is from late payment or even nonpayment from a customer. Late payment gives rise to all kinds of trouble for any company, but especially for small, capital-deficient companies. Receivables accountants maintain an aging chart for invoices. After 30 days, the receivables person will begin to get nervous and get on the phone to roust the customer for payment. After 60 days, people are getting jumpy about payment and after 90 days there may be calls to the customers president or controller.
When a company has a cash flow problem, they will direct whatever cash they have into their most critical expenses in order to keep the place running. Your invoice may not be at the top of the list. When you encounter this problem with a customer, it is important to keep your cool and try to get whatever they can afford to send. Chances are good that they are already twittered about it so threats and heavy handedness may be a waste of time. But often it is the squeaky wheel that gets the grease (or lucre) in these circumstances. So it is always worth talking to the customer about payment.
This whole business of pricing, invoicing, and getting paid is deadly serious and the inability to do it well will shut a company down quickly. We technical people often discount the accounting end of our business, perhaps believing that it is the domain of lesser skilled persons. Successful companies, however, know that a good accounting group and clear policies are crucial for stable operation.
Start-up companies, however, may not pour resources into accounting systems as generously as they should. Often, it is the founders who do the accounting themselves in the early days. Eventually, the founders realize that they need book keepers and accountants to manage all of the cash flow issues.
Lamentations on Chemistry 