How Manufacturers Can Help Distributors Ramp Up Their Cash Flow
A friend of mine, Abe WalkingBear, developer of a copyrighted profit system that focuses on improving cash flow, has agreed to share some of his insights (some are truly unique) on how manufacturers can help distributors. He’s written books, is an international speaker and co-authored STAFDA’s Foundations of Business 2007.
Old military funny money finds new life in business. During this time of slow sales and extended delays in business credit customers’ payments, an old idea is reborn.
During the Vietnam War, U.S troops and sailors in Asia were paid in funny money, i.e. MPC (military payment certificate). This funny money, which was also called “monopoly money” or “script,” was in use up until 1973. Members of the American military could convert MPCs to US dollars upon leaving a designated MPC zone, but while in these zones, all you could do with it was go to the Post Exchange (PX) or the Ship’s store and convert it to the local currency. MPC in Vietnam had pictures of movie stars on it and I can’t remember for sure, but I think that Marilyn Monroe was on the $20 bill.
Interesting, but what does this have to do with improved cash flow and more sales?
Distributors sometimes offer their business credit customers a 2-10-N30 payment term. i.e. the customer can take a 2% discount off the invoice amount if they pay it within 10 days, otherwise the full invoice amount is due in 30 days.
The idea behind the early pay discount being to spur cash flow.
Any business customer not taking advantage of a 2-10-N30 early pay discount fails to do so for one of two reasons:
1) they don’t have the financial ability to do so…no money
2) the sales and credit guys failed to explain that a 2-10-N30 is worth a 37.24% Annual Rate of Return…where else can you get 37.24% return with no risk?
There are several problems with early pay discounts:
First, business customers sometimes will issue a check for payment on an invoice, less the 2%, on the the 10th day, but will not release the check until the 30th day or the 60th day thus defeating the very reason why the discount was offered in the first place.
Second, the taking of “unauthorized discounts” by the business customer by failing to pay within the 10 days creates additional work and cost for both the distributor and the business customer in the pursuit of the unearned discount. And this in turn can actually lead to the loss of customer good will and of future Sales.
I’ve never liked 2-10-N30 terms for these reasons.
The Best of MPCs and Early Pay Discounts
There is a way to use an early pay discount to improve cash flow and also bring business customers back to buy again thus gaining the most profitable sale, the repeat sale.
Instead of offering a 2-10-N30 term, a distributor can send out, along with an invoice, a VCDC; A Valued Customer Discount Certificate for 2% of the invoice amount…and they can put the selling company’s CEO’s picture or the selling salesperson’s picture on the certificate…or Marilyn Monroe’s picture.
Each VCDC would carry the same # as the invoice it applies to and thus would be easy to track.
The VCDC would clearly state that if the invoice that the VCDC applies to must be paid within 10 days of the invoice date for the customer to use the VCDC on their next purchase.
If a business customer pays within 15 days..they should be cut some slack and the VCDC accepted…on that next and most profitable purchase, the repeat.
The end result: Improved cash flow and repeat sales.
All too often in business we walk a mental rut, we do the same thing over and over again in the same way, until the rut becomes a mental trench and then we think we can see the horizon for oncoming danger or new business opportunities when in effect all we really see is a wall. And that’s not to say that a trench can’t be comfortable and easy to navigate, but God help you if things change and the walls give way.
During this time of slow sales and extended delays in business credit customers’ payments, manufacturers can add value to their distributors by sharing with them an old idea reborn anew on how to gain a competitve advantage while improving cash flow and repeat sales.
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