Unit 3b:Cash flow
Listening
So,Steve,how's the cash flow situation?Any better?
Not really,no.The more we sell,the less cash we seem to have.
Yes,I know.It's called over-trading.
You're going to have to figure out a quicker way of turning those sales into cash.
But how,Barbara?That's the question.
Well,did you think any more about offering early settlement discounts?
Oh yeah,we talked to most of our customers about it.
They sounded quite interested.
It seems that if we offered a 1% discount,about half our customers would pay in ten days.
Well,that would make a big difference to cash flow.
But if we offer 2%,three quarters of our customers will pay within ten days.
That's great,So why don't you do it?
Oh come on,Barbara.Our margins are small enough already.I don't see how we can offord to offer discounts.
If we gave a 2% discount,we'd lose thousands of dollars every year.
Do you know how much exactly?
Well,on average monthly sales of$25,000,it'd cost us over four and a half thousand a year.
What if you offered 1% and half your customers used it?
Well,that'd cost us about 1,500 a year.That's a lot of money,Barbara.
But don't forget your financing costs,Steve.
Financing your cash flow gap means you're paying the bank almost $3,000 a year in interest.
I worked out that if you offered the 1% discount,
you'd save almost a thousand on financing costs.
So what you're saying is the real cost of the discount
would only be $500 more.?
That's right.And your cash flow for the month would increase by over $8,000.
And with the 2% discount,you'd have an extra 16,000 a month.Wow.
That much?We could really use that extra cash,Steve.Hmm.
I still think 2% is too much.
Then why don't we offer 1%?
Mmm...Barbara?
Well,it's not my decision.But if I were you Steve,
I'd really think very seriously about offering an early settlement discount.OK,
OK.I get the point.If it really can make that big a difference,
we'll give it a try.