Your cost of capital is everywhere. It’s in your costs to finance inventory, receivables, capital expenditures, machinery upgrades and any aspect of your business where you need to pay for future growth. In fact, an argument can easily be made that these costs are only increasing in an economy that has yet to fully recover from the last recession. Granted, interest rates are low, historically low. However, when your customers take longer to purchase product, don’t purchase as often, and then take longer to pay, then your costs increase – no matter how low your company’s borrowing costs are.
The Cost of Borrowing Money
Most companies are well aware of their borrowing costs. Most understand that inventory costs them money, and costs them more the longer they hold it without sales. Most understand that the longer it takes customers to pay, the higher their costs to support that business. However, very few companies put a plan together to reduce their financing. Very few are aggressive enough to systematically limit the impact of their borrowing costs on their bottom line.
It’s hard in today’s economy to manage inventory, sell product and then manage customer receivables. It’s often a question of one step forward, two steps back. You want that sale and may rationalize that an open invoice is far better than no invoice. As such, the intention isn’t to imply that reducing these expenditures is easy. It isn’t. However, there are some aspects of your business where you can exert some influence on reducing their impact. Now the question becomes: Can your company effectively lower its borrowing costs?
Alternative Financing: Invoice factoring, and other Asset-Based lending options, can help reduce your costs of money. Factoring isn’t a loan and won’t appear as one on your balance sheet. Using the liquidity of existing assets may help reduce your borrowing costs by eliminating the high charges that come from waiting for customers to pay their invoices.
The table and video above are taken from the post: Sample Receivable Factoring Excel Sheet: Effective Rates & Interest Rates
Inventory Turnover Rates & Customer Credit: How often does your company do an effective review of its inventory turns? More importantly, do you incentivize your salespeople to speed up your turnover rates? A number of companies are redefining their sales key performance indicators to include the costs of financing inventory and receivables. The idea is to reward salespeople who increase inventory turns and help to better manage customer credit.
Infrequent Customer Demand: Seasonality is difficult to manage, as are those ups and downs within your business cycles. However, in this case, we’re referring to the impact of customers who continually put a hold on orders, ones who’ve place the order, but then call and ask for the delivery to be pushed out. These delays can be seen as opportunity costs; customers who are willing to take orders immediately are sacrificed for those who continually delay their shipments. It’s most prevalent for customers who manufacture custom-made parts. Design changes and delays force your company to hold semi-finished product longer, thereby increasing your costs on financing. What you must do is define your inventory carrying costs on custom-made products.
Your costs to borrow money are constantly impacting your gross profit on sales and ultimately, your company’s bottom line. However, it’s not just relegated to the costs of inventory, costs to support receivables or how much you must cover in terms of capital expenditures. These expenses are found throughout your enterprise and you must pursue strategies to reduce their impact on your business. Look at your costs to support the sales of finished goods. Look at your expenditures on receivables. Finally, it’s also important to be aware of the hidden opportunity costs of customers who continually delay orders.
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