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.
Additionally, and importantly, less money today is worth more than a greater amount tomorrow.
$7 today can have greater value than $10 tomorrow.
Why? Well if you spend the $7 expanding capacity you will begin generating a return on that investment sooner.
In the widget scenario, if Uncle Sam allowed it, you could offer a 10% discount on the first contract if they paid in advance. For the sake of argument, let’s say that 10% is your profit margin. Now you’re breaking even. On the surface, that’s lousy. But! You can use that money to expand capacity and accept the two other contracts. So in six months you’re not at net 10% * 1 project, you’re at 10% * 2 projects. And afterwards, you have grown to deliver three projects at a time rather than one.
So if cash is the only thing holding growth back, explore what it would take to get customers to pay you more and sooner.
Gilded calendar tool used under the public domain courtesy of the Metropolitan Museum of Art CC0,