A subject ignored by many entrepreneurs is the impact of the daily cost of money. Among the immediate costs involved, include a company’s overstock or obsolete inventory, its customer invoices that aren’t being paid, its credit rating, and the payment terms it has with its vendors. However, the problem for several entrepreneurs starts with a lack of understanding of what constitutes the daily cost of money. For entrepreneurs looking to reduce their cost structure, understanding what’s involved with this added cost, and setting plans to reduce its impact, is essential to success.
What is Included in The Cost of Money?
Many entrepreneurs use loans and credit lines from banks to finance the purchase of their inventory, run their payroll, and cover many of their day to day operational costs. The yearly interest paid on these credit lines and loans can be broken down into a daily interest rate. Successful entrepreneurs track this daily interest rate, and its effect on their bottom line. So, what are the areas that these successful entrepreneurs look at when considering the impact of their day to day costs of money?
How Does Inventory Impact These Costs?
One of the single biggest costs facing entrepreneurs, and small businesses alike, is the cost to support their inventory. As previously mentioned, many businesses use loans and credit lines to finance the purchase of their inventory. Therefore, every day inventory isn’t sold, or becomes damaged, is just another cost from the daily interest rate. This is because the company must still pay interest on the loans to support this damaged and unsold inventory. It takes money to support inventory, and every day that inventory isn’t sold, the costs simply add up. To alleviate this cost, entrepreneurs must be successful in running an efficient inventory.
How Can a Customer Help Reduce These Costs, and Improve Cash Flow?
The easiest way to reduce these costs, is to have customers that pay their invoices immediately. Sounds relatively easy doesn’t it? Well, it’s obvious that this simply isn’t feasible. However, the best entrepreneurs pursue the customers other companies simply choose to avoid. Customers that aren’t able to get any credit terms, and must prepay their orders, are excellent candidates to not only reduce these costs, but also to improve cash flow. Successful entrepreneurs understand the importance of these prepaid accounts, and as a result, will actively pursue these “less than desirable customers”.
Can Vendors Help Businesses Reduce The Costs of Money?
There are two ways a vendor can help entrepreneurs. First, vendors can provide discounts for prompt payments on invoices. The best entrepreneurs negotiate these discounts and take advantage of them when they can. Second, vendors can help manage a company’s credit rating, by not immediately reporting a business when it’s a day or two late on an invoice. A better credit rating means a lower interest rate on loans and credit lines. Therefore, successful entrepreneurs must manage their vendor relationships, and move them towards partnerships, by constantly keeping vendors updated on when they can expect to be paid.
With numbers that stipulate that half of all businesses fail in the first year, successful entrepreneurs must understand the importance of cost management. By taking the time to mitigate their costs of inventory, taking advantage of prepaid customers and discounts for prompt payments with vendors, and finally, managing their credit rating, entrepreneurs can drastically improve their chances of success. It’s all about knowing costs, and how to reduce them.
Ian Johnson - I currently run a business blog called www.driveyoursuccess.com. I have over 15 years consulting experience in production cell management, ...
