Covid-19 or otherwise, every business is always at a crossroads to protect its Working Capital. This helps the business to be able to stay afloat. We explore how to keep this balance while negotiating Agreements.
Big Picture
Every business is always negotiating Commercial Agreements on two ends: Agreements with Vendors to receive products or services, Agreements with Customers to provide products or services.
So, every business is a Buyer when receiving products from a Vendor, and a Seller when providing products or services.
But here is the catch, if the business is paying as a Buyer more regularly or higher than getting paid as a Seller, the business is burning cash at a fast rate than it is generating. Venture funded or Bootstrapped, such a situation is ripe for a disaster because this slowly leads to erosion of Working Capital.
A Positive Working Capital is when a business has more current assets than current liabilities, meaning that the business can fully cover its short-term liabilities as they come due in the next 12 months.
So, Working Capital can be managed by controlling Acceptance Clause as a lever in the Agreements!
Acceptance is one of the key provisions in Commercial Agreements and defines the course of the business relationship. Hence right care should be taken in drafting the acceptance provision as it can become a deal maker or deal breaker in any industry.
Acceptance plays an important role for both Buyer and Seller.
While Buyer would try to increase the time period to retain the Working Capital in hand, Seller on other hand would like to recognize revenue for the services/product sold to Buyer at the earliest.
An example, while a business as a Seller, would want to get paid in 7 days, as a Buyer the business would like to pay in 30 days.
Businesses need to keep a track and negotiate for extending the period of Acceptance (to the extent reasonably possible) before it triggers the payment clause as Buyers, while keep an eye out and negotiate to reduce the Acceptance period as Seller.
So, what do you do?
Review. Keep, a close eye on the Acceptance Clause. As a Seller, avoid accepting indefinite period of Acceptance, multiple rejection opportunities for your Customer, rejection without assigning a reason for the goods/services. As a Buyer, avoid automatic or deemed acceptance upon receipt of goods/services.
Track. Post Contract execution, keep a track of the average time period you are taking to Accept as a Buyer before you are required to pay, while as a Seller also keep a track of the average time period that would take for you to recognize the revenue.
Benchmark. Define, for the types of the service being procured the minimum period which you would require for Acceptance Clause against Industry standards, and benchmark for your line of service the maximum period you would allow before Acceptance of service.
Remember, you want a positive outcome: Positive Working Capital.
This is an opinion piece and must not be construed as a Legal advice.
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