Imagine that you’re a government contractor supplying widgets for the department of transportation. It’s a good setup, but one of the downsides is that Uncle Sam dictates when you get paid- which happens to be 60 days after you’ve delivered and invoiced 100% of an order. Manufacturing widgets takes four months. That means it takes at least six months to see a return. Your costs are immediate, but your income is delayed.
In this fantasy scenario, what happens when two more proposals suddenly get accepted in other states?
Now your immediate costs have tripled and sales have overrun your ability to deliver. You have to cancel the additional proposals.
A larger operation would have the capacity to handle the additional sales. Ironically, you could become that version and address the extra orders if you had your profits today and not six months from now.
If you’re trying to grow your business, you need resources in the form of cash to fund expansion. Most of us think acquiring more customers or taking on a loan are the only routes to get this. However, there are many alternatives and one tactic to create cash is to change payment terms so that you get paid in advance.
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