$100,000 Invoice paid in 60 Days
Assuming it is paid in 60 Days
The business has a 7% annual Growth
The Present Value of this is $98,844 ($100,000/(1+2.25) .16
(.16= 2 month’s collection period)
Present value = Future value / (1+r)n
If you can get an 80% advance rate with 7% return to your business, you get $80,000 Now, plus 7% return = $5,600 Annual Return ($933 for 2 months)
You pay 2.25% on the $100,000= $2250
And you still get $17,750 in 60 days
So for paying $2250 (which is tax deductible) , you get $933 ($5600/12 * 2 months)- Real cost of $1317 -The effective interest you paid now is only 1.3% and you got use of the cash immediately.
The higher the rate of return on your business investment, the better this formula works in your favor!
Use the $80,000 now to get:
- More Inventory
- New equipment
- Renovate the office
- Or for anything you like!
Help your clients with Liquidity:
Most clients are struggling with Cash Flow as well and would be willing to pay a little bit more for products or services if you offer payment terms rather than cash on delivery. Taking the above example, if you charge 2% more — I.E. $102,000, you have just covered that $1317 cost and made $683!! Your Profit Margin just increased .
Pay your suppliers quicker and request a discount on the cost of your goods. So if your cost of goods was $60,000, imagine reducing it by 1% or $600, combined with the other changes, you now increased your profit to $1283.