This post is part of a series on a lack of working capital.
- Part one discussed how a lack of capital limits your sales.
- Part two covered how a lack of capital limits your hiring.
- Part three introduced two ways wise cash management can save a business money..
- Part four explored two ways good cash management can increase a business’s profitability.
Two More Ways Wise Cash Management Can Improve Profits.
In the third post I wrote in this series, I wrote about how wise cash management can increase your profits. Then, in the last post, we looked at how eliminating finance charges and establishing business credit can improve your business’s bottom line. Today we are going to look at how making bulk purchases and establishing early payment discounts can increase profitability.
Buying In Bulk
One of the first lessons about business I remember learning was about buying in bulk. My family had a membership to Sam’s Club when I was young. One of my favorite things to do there was to walk up and down the bulk candy aisle. As a kid, I always wanted to run a candy store out of my locker at school. I would even go through the office supply store catalogs looking for cash registers to serve my customers. Because candy was so cheap at Sam’s, where I could buy in large quantities, and because a kid desperate for candy will pay almost any price, I was convinced that if my mom would let me buy just a few boxes of Airheads, Snickers, and Super Ropes licorice I could have made a pretty profit. While I never was able to get that candy store going, it taught me that if you can buy more of something that you’ll need in the future, you can often drastically increase your profits. Having a strong cash position allows businesses to pay for some additional product up front and get better pricing from suppliers.
Establishing Early Payment Discounts
Finally, after working to avoid finance charges, establishing trade credit with its suppliers, and purchasing in bulk, there is one more way for a business to turn its working capital into extra profits: negotiating early payment discounts from suppliers. Every business likes to be paid sooner rather than later. Some businesses will even provide a discount to its customers that pay before the invoice comes due. A common discount extended by businesses is “2%/10 Net 30.” This means that if the invoice is paid in full within 10 days, the customer can take a 2% discount. If the buyer does not pay in that 10-day window, the invoice is still due in 30 days without a discount. There really is no standard discount across all industries, but I have seen them as high as “6.5%/Net 10.” Taking advantage of vendor discounts can go a long way toward increasing profitability, especially if the discounts are offered by a business’s biggest supplier.
Do You Have a Business that Can Benefit from More Working Capital?
It’s common for the profitability of a business to be limited by a lack of working capital. If you’ve found yourself in a situation similar to the ones described in any of the previous posts—if you can bring more money to the bottom line by increasing your working capital — let’s talk. At Commonwealth Capital, we help our clients solve the challenges brought about by a lack of working capital. By turning invoices into cash and proactively managing receivables, we are focused on helping our clients build a more profitable business.
- “Need” is the operative word here. It’s really easy to think you’ll “need” something in the future, only to let it sit and lose value in a warehouse, basement, or garage. ↩