Better Terms, Better Business

January 11, 2023

Why businesses must think beyond sales and revenue

Although a contract between an importer and exporter can span dozens of pages and include hundreds of different items, the supplier tends to focus disproportionately on one: the sales price. From this sticker tag, the importer can calculate the gross profit on this particular deal and the net profit.

Paying close attention to these figures—the sales price, the gross revenue, and the net revenue—is of course crucial. Overlooking these numbers will cause any organization to quickly go out of business. The issue is that most exporters concentrate solely on these figures at the exclusion of equally important measures, such as payment terms.

The focus on just a handful of figures is rooted in the fact that contracts are driven primarily by salespeople. Since their performance and incentives are tied purely to the business development figures mentioned above, they naturally put all their resources into negotiating the highest possible sales price. These salespeople will try not to budge from a given price and instead upsell importers with additional goods, lock them into more business, or find other creative ways to charge more.

While these efforts are well-intentioned, the problem with these charges is that they are just that: charges. These sales exist only on paper until an exporter collects, which can be a difficult task. On top of having to deal with terms that are inherently favorable to the importer (with payment terms lasting up to several months, even though goods are delivered immediately), the exporter also has to contend with late payment or non-payment. Blank swan events, like COVID-19, can push importers to further hold payments to suppliers, even though cash flow during these incidents affects everyone, not just them.

From this vantage point, it would not be unreasonable to view the sales and revenue figures for exporters as almost a vanity metric. A vanity metric is a measure that professionals may meticulously track and celebrate, even though it may make no meaningful difference to the business. For an eCommerce website, a vanity metric may be pageviews, if those site visitors are not ultimately converting into customers. For a SaaS business, a vanity metric may be users, if few signups are using the product beyond the initial registration.

In much the same way, one could argue that the business-development figures in the supply chain are also partly vanity metrics because they don’t give a full indication of business success. An exporter, for example, could be posting record sales and revenues on paper, but the business reality could differ dramatically. If any of those transactions are done with importers who have negotiated favorable payment terms, tend to pay late, or even worse, meet both of these conditions, the exporter with the all-time sales may actually be cash poor.

With little working capital, the business may eventually be unable to fulfill some of those orders, which will cause the business to come crumbling down. Some importers may cancel their orders due to late delivery of goods, others will switch to other suppliers, and still, others may hold the exporter financially or legally responsible for the goods not being delivered on time. The operative word in vanity metrics is vanity: They may make business leaders feel good in the short term, but they merely cover up deeper, more serious problems that are bound to emerge in the medium- to long term.

A finance-driven approach to business development

To succeed, businesses should not only take the lens of business development when striking deals with importers – they must also carefully evaluate each contract with finance in mind. This process should be done collaboratively: Rather than just asking an exporter’s salespeople to also consider finance metrics, exporters should bring in finance professionals to weigh the pros and cons of each deal. Since working capital is integral to any business, the metric that finance professionals will likely pay the most attention to is the payment terms. Simply put, they will advocate for as much of the money as soon as possible. The finance team may ask for some capital to be paid up front as a downpayment, and the rest to be paid within a much smaller window than is customary.

This is what the exporter’s finance team will request, but not what they will necessarily get. The importer faces the same business demands as the exporter: They also have to closely guard their working capital. To free up cash flow, the importer will naturally push back against the shorter payment terms in favor of a longer window. This is the friction inherent to any exporter-importer relationship: For the exporter to win (i.e. get shorter payment terms), the importer must lose (i.e. pay more capital sooner). For the importer to win (i.e., get longer payment terms), the exporter must lose (i.e., get capital much later). In this old model of the supply chain, importers and exporters are placed at odds with one another in a zero-sum game. , which sadly often includes bad actors who may outright lie for a better negotiating position.

In an environment with directly oppositional goals, the exporter will undoubtedly secure some wins. A handful of importers may agree to shorter payment terms, with some even conceding to some form of upfront payment. But counting on all importers to agree to pro-importer terms is not only unlikely but also a significant waste of resources. Exporters will have to commit more talent to negotiating these shorter payment terms and spend more man-hours going back and forth throughout the process.

In the end, this resource-intensive process will make a negligible difference, since few importers will agree—they hold most of the leverage, after all, as the buyer. In the event they do agree, there is no telling whether they’ll follow through. Just as importers frequently do not comply with longer payment terms, they can just as well not comply with shorter payment terms, electing to pay much later than what was agreed upon. In this scenario, the exporter is even worse off as a business, as rather than just adopt the customary terms, they wasted additional resources negotiating for pro-exporter terms that were not followed through in the end.

There is a better way than importers and exporters taking opposite sides of the proverbial negotiating table. Through the innovation of invoice financing, the two parties no longer have to be in opposition to one another when it comes to payment terms. Removing this friction, they can focus on collaborating with one another to grow the business overall rather than haggling back and forth.

This idea sounds almost too good to be true, but the way it works is simple. Let’s examine invoice financing from the exporter side. As usual, the exporter ships their goods to the importer, and then the process diverges from here. In the legacy process, exporters will have to deal with waiting for 120 days for the export receivable to be paid, meaning they’ll simply have to contend with less working capital until then. With an invoice financing platform, in contrast, exporters can be paid upfront in as little as 3 days. Even though the benefits to exporters are enormous, the transaction is fair: The export receivable is paid up to as much as 90% of its face value, and the invoice financing platform takes a small fee for its role).

By using an invoice financing platform, exporters increase their working capital, which is as important to the success of the listed sales and revenues, if not more so. With greater cash reserves, exporters can partake in more activities that grow the business, rather than simply bide time until the next export receivable is paid. Exporters can strive for economies of scale by buying more raw materials, so they can produce goods cheaper. Exporters can canvass for more partner importers, who will again be easier to work with since the presence of an invoice financing option makes each deal collaborative rather than competitive. Exporters can explore new product categories to diversify their catalogue for partner importers.

Invoice financing, in short, is a useful instrument. This innovation forces exporters to see deals not only in terms of sales and revenue but also in payment terms. By dramatically reducing the window in which they are paid, exporters can benefit from a simple formula: better terms, better business.