It may seem obvious to say that profit is the difference between buying and selling goods or services. But the need to manage payment terms in order to make profit can be overlooked.
One of our clients was an importer of electrical equipment. The owner and the purchasing director saw an opportunity to switch suppliers from Taiwan to China, and get the same quality goods at half the cost which would double their profits. Without an FD, they ran into cash flow problems, and their bank manager suggested that they call in interim FD assistance. We found that:
- The company had built up a good working relationship with their previous supplier, who invoiced them 50% on shipping from factory and 50% 30 days later. The new supplier, who didn’t know them, demanded the usual 50% payment on placement of order and 50% payment on shipping from the factory;
- The previous Taiwan supplier shipped goods in 20 foot containers, while the new Chinese supplier shipped goods in 40 foot containers. Rather than pay for empty container space the company ordered twice as much and so they still had the same amount of cash tied up in stock as before, which would take twice as long to convert into sales;
This company had invested more than they intended and eventually got a better return on its capital. But getting there wasn’t as easy as they thought. Cash really is king because unless it is properly managed you won’t achieve your goals.