Lessons · Lesson 5 of 6
- 01 · The order that paid well and nearly closed the factory
- 02 · A margin problem and a timing problem need opposite remedies
- 03 · Why a good year is the dangerous one
- 04 · What one day costs, and which day it is
- 05 · Six levers, priced — and who owns each one
- 06 · Buying days: the discount that cost more than the gap
Six levers, priced — and who owns each one
Put a dollar value on every way of shortening one order's cash cycle, and be honest about which of them the factory can actually pull.
Lesson 5 of 6 · 20 min
The list everybody has and nobody prices
Ask any merchandiser how to improve cash and you get the same six answers. Get a deposit. Get longer terms from the mill. Ship earlier. Invoice faster. Pay less up front. Sell the receivable. All six are real. They are also worth wildly different amounts, and at least one of them loses money every time it is used.
This lesson prices all six on PO VLD-2209, where funding the calendar cost USD 12,963.18.
Lever 1 — a deposit from the buyer
Vindelund pays no deposit. Suppose it paid 20% with the PO on 12 January. That is USD 66,360.00 sitting in the account for 207 days before the balance arrives.
66,360.00 × 207 × 0.00032877 = USD 4,516.12
That is 34.84% of the entire funding cost, from a single clause. It is the biggest lever on the list by a wide margin, and Kalabsha cannot pull it. Vindelund's purchase-order terms do not provide for deposits on repeat business, and that is a policy decision taken above the buyer Kalabsha talks to.
Lever 2 — thirty more days from the mill
Athribis Knitting Mills takes half the fabric value at 30 days from delivery. Ask for 60 and the second payment moves from 5 April to 5 May.
72,912.00 × 30 × 0.00032877 = USD 719.13
Athribis will do it. The price is 1.5% on the fabric, which on USD 145,824.00 of fabric is USD 2,187.36.
Do not stop at "USD 2,187.36 is more than USD 719.13". Convert the offer into a rate. That is the only way to compare it with everything else in this course. The factory is paying USD 2,187.36 to defer USD 72,912.00 for 30 days:
2,187.36 / 72,912.00 = 3.0% for 30 days, and 3.0% × 365 / 30 = 36.5% a year
Against a bank line at an illustrative 12.0%, that is money at three times the price. Refuse it, and borrow instead.
Lever 3 — ship six days earlier
Pull the bill of lading from 8 June to 2 June and everything after it moves forward six days.
6 × 94.11 = USD 564.66
Getting there needs a weekend shift and a re-booked vessel: USD 3,400.00. On finance grounds alone this loses USD 2,835.34, and it is a clear no.
That result goes further than most people expect. Speed is a weak cash lever compared with terms. Expediting is paid for in cash today and saves interest in cents. There are excellent reasons to ship early: a season, a booking, a promotion, a buyer's own calendar in course 27.3. But "it helps our cash flow" is almost never one of them at these rates.
Lever 4 — get the invoice logged on time
Vindelund's PO says 60 days from the bill of lading date. Vindelund's payment run pays what is in its accounts-payable system, and an invoice that is not logged is not in the run. On VLD-2209 the commercial invoice reached the buyer's shared mailbox on 8 June and was entered on 17 June. So the order was paid on the run following the date the system held, not the date the contract held.
9 × 94.11 = USD 846.99
It cost a clerk an afternoon. It is the second-cheapest thing on this list to fix, and one of the largest amounts the factory can recover on its own. And there is nobody in the building whose job it is. Course 12.1 owns the document set and the discipline of getting it right the first time. What this course adds is the price of getting it late.
Lever 5 — a smaller fabric deposit
Ask Athribis for 30% with the order instead of 50%. That moves USD 29,164.80 from 26 January to 5 April, which is 69 days.
29,164.80 × 69 × 0.00032877 = USD 661.60
Athribis wants nothing for this, because it does not change the total or the final date. It changes only the split. It is worth asking every time, and it is worth almost exactly what getting the invoice logged on time is worth.
Lever 6 — sell the receivable
Discount the invoice, factor it, or insure it and borrow against it. All real, all available, and priced in course 13.5, which is where they belong. Do not reach for them before the five above. This is the only lever on the list that costs a fee whether or not the cash is short.
The scoreboard
| Lever | Worth | Share of funding cost | Who decides |
|---|---|---|---|
| 20% deposit with the PO | 4,516.12 | 34.84% | The buyer |
| 30 days of credit instead of 60, from the buyer | 2,823.23 | 21.78% | The buyer |
| Invoice logged on the day it ships | 846.99 | 6.53% | The factory |
| 30% fabric deposit instead of 50% | 661.60 | 5.10% | The mill, usually free |
| Ship six days earlier | 564.66 | 4.36% | The factory, at a loss |
| 60 days instead of 30 from the mill | 719.13 | 5.55% | The mill, at 36.5% a year |
Add the two the factory can genuinely pull on its own, and that nobody has to be persuaded of. Those are logging the invoice on time and a smaller fabric deposit. Together they are USD 1,508.57, which is 11.64% of the funding cost.
Add the two that belong to the buyer, the deposit and thirty fewer days of credit. Together they are USD 7,339.34, which is 56.62%.
Check yourselfYour trim supplier offers 2% off for payment with the order instead of at 45 days. Your line costs 12.0% a year. Take it?Show the answer
Yes, comfortably. Paying 45 days early costs you 45 days of interest at 12.0%, which is about 1.48% of the amount. Getting 2% for it is a gain of roughly half a percentage point on the trim value. As a yearly rate it is 2 divided by 98, times 365 over 45, which is 16.55% a year against a cost of 12.0%. The same formula that condemned the mill's offer in lever 2 approves this one, because here you are the lender rather than the borrower. Always convert an offer to an annual rate before deciding which side of it you are on.
What to take away
- Price every lever in dollars on this order before ranking them. Intuition ranks them almost exactly wrong.
- Convert any supplier's credit offer into an annual rate and compare it with your facility. Thirty days for 1.5% is 36.5% a year.
- Speed is a weak cash lever. Expediting costs cash now to save interest later, and the trade rarely works at ordinary rates.
- Fix the free things first. The invoice logged on the day it ships is worth more than shipping six days early, and it costs nothing.
- Be honest about ownership. The two largest levers belong to the buyer, and knowing their value is what turns a request into a negotiation.