Small Business Management: Defeating the Daily Cost of Money
As a small business owner, are you aware of the daily cost of money? Do you know what this daily cost of money costs your small business every day you operate? There are a couple of questions that immediately stump business owners, and this is often one of them. How can a small business owner better manage this cost so as to reduce its impact, and save money?
To understand the impacts of the daily cost of money, we’ll look at what’s involved, and review some simple and straightforward methods of reducing the impact of this cost. While the methods are easy, the execution is something else entirely, so it’s incumbent upon you as a business owner to track your daily cost of money. So, what is the daily cost of money?
As a business owner, you most likely have to finance the purchase of your inventory, payroll, and day to day operations, with a business bank loan or business credit line. As such, your business must pay a yearly interest rate to borrow this money. This yearly interest rate can be divided up into a daily interest rate, and it’s this daily interest rate that is converted to become the daily cost of money.
Let’s assume that as a small business owner, your yearly interest rate is 7% on business loans and lines of credit. This yearly interest rate can be converted to a daily interest rate by taking this 7% and dividing it by the 365 days in a year. Doing this will provide your business with a daily interest rate and your daily cost of money. In this case, the daily interest rate would be about 0.01917%. Doesn’t sound that bad does it? Well, let’s take a look at the following examples to see how this daily cost of money can impact your business.
How the Daily Cost of Money Impacts Inventory
Let’s assume your small business uses a business loan or credit line to finance your full inventory value of $150,000.00. Of this inventory, some products move very fast, within a couple of days or within the month, and some not to fast. While those products that have a quick ship time are not a concern, it’s the products that remain in your inventory for extended periods that can often cause a problem.
So let’s assume that of this above amount, $40,000.00 of the inventory is obsolete, outdated, overstocked or is simply dead stock that isn’t selling. Every day your small business doesn’t sell that inventory, you are still paying a daily interest $7.65. Over a year, that amount is $2,792.25 for a 7% interest rate. Now, this is simply an example and most businesses are able to get a much better interest rate on their loans and credit lines. However, the rule still applies. Here’s another example to consider.
How the Daily Cost of Money Impacts Receivables
Let’s assume that your small business uses business loans to finance the purchase of $25,000.00 worth of inventory, and then sells that inventory for $30,000.00. Your business has generated a gross profit of $5,000.00. However, that is only a gross profit if your customer prepays the invoices – sends the money first, which is not often the case. Instead, your business likely provides 30 day terms on invoices.
Your business is paying a daily interest rate of $4.79 to finance the $25,000.00, so every day it takes your customer to pay their invoice, is another $4.79. At the end of the 30 days, it costs your business $143.83, at 45 days it’s $215.75, and at 60 days it’s $287.66. So, you can easily see how the longer a customer pays, the more costly it is to your business.
How Can a Business Defeat the Daily Cost of Money?
These two examples above show how to both track the daily cost of money, and where to look for when considering how it impacts your small business. Want to improve your cash flowand reduce the daily cost of money? The answer is pretty simple. Take the time to deal and sell to those less than credit worthy customers you’ve been avoiding for so long.
Customers that can’t get credit from your business, likely can’t get credit anywhere. As such, if they have to prepay, sell to them. It’s money immediately in your company’s pocket and your small business won’t need to finance any invoices. In addition, these un-credit worthy customers are also great outlets for dead stock, and obsolete inventory.
These are the customers you need to sell your overstock product to. Also, when it comes to inventory, are you tracking the impact of damaged inventory to your bottom line? The daily cost of money brings home the impact of damaged or obsolete inventory. Also, don’t forget to sell dead stock immediately, and use discounts to incentivize customers to take your overstock products.
Sell to prepay customers to defeat the daily cost of money
Sell dead stock or obsolete inventory immediately to defeat the daily cost of money
Reduce the amount of damaged inventory to defeat the daily cost of money.
Make sure to enact strategies to reduce the daily cost of money. Making these minor adjustments will produce significant savings over the long term.
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I'm Ian Johnson, a part-time B2B consultant. Have a question that needs answering? Send me an email.
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