Too many business owners we meet are “money cost” fixated. This means that they focus too much on the cost of money and not on how much money they can make.
One of the most common mistakes business owners make is that they get all hot under the collar about the cost of working capital when they should really be using the ledger sheet method and calculating their optimal profit margins. What do you do once you have the sales in hand and have some history to show? Get to your local bank and negotiate for cheap money – that’s when they’ll be ready and waiting and with open arms!
CASE: A wire and cable installer had the chance to take on more work, but was COD with their suppliers. Their workers were union members so cash flow was critical. Their profit margin was only 4%, they were turning away work, and they were getting paid in 60 to 75 days. When we analyzed their costs for financing their receivables, the margin was going to run close to 5%. If their cost of money was going to exceed their profit margin, why did they move forward with our proposal?
Their base sales offered an existing 4% profit; however, their new sales afforded a 23% profit (sales – variable costs, i.e., materials and labor, etc.). So by using our financing, not only did they double their sales, but they tripled their profit margin.
Fortunately their accountant had the insight to see that this would allow his client to break away from being average and grow. The end result was that within a year, they were able to access bank financing, and we added another success story to our portfolio!