Cash Flow: Revenue (Grey Area)
June 29, 2009, 6:27 pm
Copyright © 2009 Integrated Profitability TM
In “Cash Flow: Revenue (Timing),” we covered ideas on how to improve revenue by making changes in the timing of the receipt of cash. The last example in that article, about influencing the type of payment mode customers use when making purchases, was crossing the line from temporary timing changes into permanent cash flow improvements.
There is a grey area between “Timing” and “Actual” ideas when it comes to improving Cash Flow.
For example, if credit cards cost 5% on average to convert a sale into cash, you might consider offering a discount if the sale is paid for in cash. In this example, a 2% discount would provide a good benefit. Some businesses already do this. Traveling around the country, there are gas stations that differentiate prices based on whether one is paying with cash or with credit. As far as your business is concerned, it all depends on the paying-willingness and flexibility of your unique customer base. How to go about it?
If you sell goods or provide services that clients pay for later, after receiving an invoice from you, you could offer early payment incentives. True, this will cost the amount of the incentive, but in some businesses it may make sense to offer a discount to encourage payment (in this case, the conversion to cash) within a short period of time after the sale–say, at point of sale or within a week. For example, a 2% discount if you receive the cash within one week might be something worth considering.
If it normally takes 60 days to receive the cash from a sale, what is the value of receiving cash within a week? In terms of time, the cash is accelerated by 53 days. There is a time value to money. In your specific case, what does it cost to “finance” the customer for 53 days? Given interest rates in the current market, the cost is probably below the 2% discount (the breakeven interest rate, for a 53-day improvement, of a 2% discount is about 14%). Even so, accelerating cash received right now might trump that consideration. If your own financing costs materially exceed 15%, the discount is something you might want to consider.
“Running the numbers” is always good business. In the long-run, you could build these types of discounts into the pricing of your products and services.
Speaking of pricing: that’s one of the ways to increase your actual Cash Flow–in the next article in this “Cash Flow” series.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 25
Copyright © 2009 Integrated Profitability TM
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