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Cash or credit?

July 1, 2009

Lately, I am beginning to see the value of dealing in cash rather than the standard 30 day credit terms that many are using (and sometimes abusing.)

I know it will limit the kind of businesses one can do. You don’t expect someone to cart over $200k to your shop to buy a house although you probably won’t mind if they did an electronic transfer to your account, hehe.

But seriously, during these times you hear all kinds of excuses like, “Boss is overseas. Nobody can sign the check except him” or my favorite, “We’ve run out of checkbooks. Can you wait till next week?” Wtf.

These days I envy some upscale restaurants that can turn over 200 cash-paying clients on any given day. With an average spend of $50 per person, that’s a cool 10 grand a day. I love the feeling of going to the cash deposit machine and depositing that much cash in one go, day after day. Don’t you? 😀

What I don’t always enjoy is depositing a check in the machine and wondering if the bank will call the next day to give me an anti-climax: they have insufficient funds in the account. Happened to me a couple of times.

There are pros and cons in the cash vs. IOU business. IOU businesses tend to be company-to-company. Smaller outfits like mine typically ride on 2-3 big clients, plus perhaps 1 or 2 smaller ones.

The good thing about having 2-3 clients is that your client management costs are low and if you are on a retainer (a fixed service, fixed sum contract) there’s nothing to worry about, provided that your clients are good paymasters. If you have 200-300 clients, your client management costs are higher but if a few of them pay late, the bulk still pay on time so its not that bad.

So if you are starting out, my advice is pick your battlefield carefully. If you have enough cash reserves, its okay to get into a business that gives credit terms. Personally, I’d make sure to have 6 months cash reserves at any time so if collections are slow, you can continue to operate for at least that long. If you don’t have that luxury, you’d probably be better off with a cash-based business (= retail) and build up your reserves before jumping off the deep end.

3 Comments leave one →
  1. July 1, 2009 8:39 am

    anyone wants to buy my comic? hahahaha. jkidding.

    i do agree that most businesses will try to delay payment as long as possible in order to “improve” their cashflow. 😛 and for a small firm, it can be very difficult. if you have a large client base, you can always kick those bad clients away but if you only have few, you will have to stick to them while looking for others.

    anyway, i thought it’s better to have 7-12 months of cash reserve esp during times like this?

    The bigger your cash reserves the better off you are. The reason for 6 months is to cover all legal obligations if you have to shut down, for example notice periods to employees, suppliers, clients, etc.

  2. July 1, 2009 3:16 pm

    well , i don’t really have this kinda issues ..

    i go COD with my suppliers , even RM10,000-20,000 . My style like that wan lah ..
    Because i take care of the accounts in my company ..
    i think credit this and owe this owe that makes the accounting super messy . i hate dodgy accounts.
    Plus , suppliers will take you more seriously in the future.

    for Customers it is all COD , or credit card

    I consider COD as a cash transaction just like credit cards because payment is guaranteed. I like the pay-and-forget mode of doing business but I do understand that if you’re in the import/export business, you don’t actually want to pay for the goods until the container arrives and you can inspect that you’re geting your boxes of iPhones instead of crates of oranges.

  3. July 1, 2009 7:19 pm

    yeah .this is where experience and long term relationship comes in ..
    i do large online transactions overseas , with people whom i trust and i never met them in person before ..

    have to start small , take a little bit of risk ..and slowly build it up ..

    usually japs and americans are alrite ..singaporeans and aussies are super dodgy.china website is a no no.

    Got buttf**ed before eh. 🙂 I’m kinda new and still a virgin by comparison, hehe. But I had a friend who ordered a container of electrical goods from China, paid for it in full and when it arrived in Sg he found something else in it. The middleman he dealt with disappeared with the moolah. A painful lesson.

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