By SueCanyon | September 9, 2007
Many of the clients that I have seen in the last few years have used one or the other of two strategies that work to improve their cash flow and their revenues, either third-party financing or flooring, but rarely have I seen both used in the same small business. And many owners don’t even know that these opportunities exist!
Have you ever wondered why doing more business, i.e. selling more product, seems to reduce the amount of cash that you have access to? Sometimes it’s because you’re spending more money on inventory, a cost which doesn’t show up on your income statement until after you’ve sold it. Your reports show that you’re profitable, but your bookkeeper keeps complaining that there’s not enough cash, and vendors are calling wanting to be paid.
A flooring plan allows you, the customer, to have your inventory, but pay for it only after you’ve sold the product. Auto dealerships that sell new cars use flooring. It allows them to fill the showroom floor and to keep a large inventory of cars on the lot. The dealership only pays for the cars once they are sold.
The number of cars a dealership sells in a year indicates to the factory how many they might sell the following year, and that determines the allotment that the factory will allow the dealer for that year. This encourages the dealership to sell as many cars as possible each year to keep the allotment for the following year very large so they can offer the best selection.
Let’s take a furniture store as another example. If you buy your furniture from one or more large vendors rather than manufacture it yourself, then you may be able to take advantage of a flooring plan where the vendor will not ask you to pay for your inventory until you sell it. Anytime you can reduce your inventory costs, you will improve your cash flow.
If you are a manufacturer of custom furniture and use special high-end woods or other materials that aren’t used often, you may be able to get your vendor to allow you to stock the materials in your factory and pay for them only when they are used, but you have to ask.
Auto body shops can often ask your paint dealer to defer invoicing for paint until you use it. The vendor may expect you to use their products exclusively, and sometimes it costs a bit more to use them, but the value in having the extra cash flow can be worth far more than the extra cost.
Deferring payment of your inventory would allow you to carry a much larger selection of paints, cars, furniture, etc. for a very long time without having to spend the cash. As I explain in the Profit Power Action Pack lessons, for each day that you can delay payment to your vendors, and for every $100,000 you have in floored inventory over a year’s time, you will have $400 more cash to use per day. So, if you can delay payment of $1,000,000 in inventory over a year’s time to your vendors by an average of 30 more days, you will have, over that year, an average of $120,000 more cash to use than if you paid for your inventory when it is normally invoiced upon delivery.
The key is to ask. Some vendors will allow flooring, and some won’t. But don’t assume that they won’t, no matter how well you know them or how long you’ve been doing business with them. It won’t hurt you if they say, “No,” and you just might hear a “Yes!”
One method you might use to convince them that it’s a good deal for them is to offer to warehouse the inventory that you will use for a six-month period, so they don’t have to warehouse it themselves. In this case, if there is any spoilage of the inventory, you will bear the cost rather than the vendor. But the vendor then has more capacity to store product for sale to other customers ‘knowing’ that they will eventually sell your product to you.
Another advantage to them is that they continue to carry your inventory on their books, which makes their company look stronger and have more borrowing power when their line-of-credit is tied to inventory. Of course, this means that you don’t get to count the inventory on your books. (In the Action Pack lessons I discuss further the pros and cons of inventory financing.)
At the same time, the furniture store owner would sell more furniture and larger groups if you offered third-party financing rather than trying to finance your customers yourself. The customer will have more buying power so will buy more or larger ticket items that they might not have bought without it, and you get your money up front rather than weeks or months later if you were to carry the note. The third-party financier (like Wells Fargo, for instance) qualifies the buyer, and the customer makes payments directly to the bank. In this way, you can show higher sales, AND higher cash flow.
If the auto body shop were able to offer third-party financing for those customers who did not have insurance as in the case of an antique car that is being restored, then you might be able to earn some revenue that you would not have earned otherwise.
You can find third-party financing in many places, like the dentist, the hot-tub store… anywhere there is a big-ticket item. Is there a place for third-party financing in your operation?
If you have the resources to handle the financing yourself, set that up as a separate company. Earning a high rate of interest can be rewarding, but only if you have enough credit sales to warrant the collections department that will be necessary. Financing is also a different business than you’re probably accustomed to. I never recommend getting into a new business because we should stick with what we know. And I wouldn’t do this, if I were you, unless I had a great deal of cash lying around and not earning a decent return. In that case, it’s better to buy real estate.
Think about ways you can use both flooring and third-party financing in your business to free up your cash and to improve your revenue. And always remember, you deserve to get paid!
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