Attempting to explain this very interesting subject in 3 parts with real life experiences :
- Cash Business vs Credit Business
- Cash Purchase vs Credit Purchase
- Cash Sales vs Credit Sales
Each part is explained in simple language broken into 6 areas:
- Benefits of Cash
- Challenges of Cash
- Benefits of Credit
- Challenges of Credit
- Real-Life Experience
Part 1 – Benefits of Cash Business vs Credit Business
Cash is the only life and death issue for your business. There are many important things in your business to worry about – people, products, service – but these are all important because they impact cash.
Credit, “There’s no such thing as a free lunch.” This adage refers to the idea that it is impossible for a person to get something for nothing. The cost is hidden and comes in a form of freedom, mental & physical health.
In 2015, faced with a dilemma of starting a Manufacturing Business, Most of the Market feedback was that in Manufacturing Business you will have to sell on credit. The Management was firm that they would deal only in Cash Sales and Purchase and if the Market did not allow then they would rather shut down the business then continue in Credit Business.
Alhamdolillah, Because of Cash Business they were able to weather and prosper from the Storms like
- Elections Slowdown
- Currently COVID-19 Pandemic
Benefits of Cash Business
- Rida Mubarak of Aqa Maula TUS
- The business would be forced to be Cash Flow Positive
- Focus on Business will increase as no tension of Supplier payments or Customer Receivables.
- Would be able to Diversify into new business products, business line or Services.
- Business and Business Owners enjoy good health.
Challenges of Cash Business
- Expansion is limited to available Capital.
- Lower Profit Margins
Benefits of Credit Business
- Easy to Start or Expand Business with Little or No Capital.
- Higher Profit Margins
Challenges of Credit Business
- The business would be Cash Flow Negative.
- A lot of Stress in following with Customer for Receivables
- A lot of Tension in dealing with Supplier for their payments
- Leads to Overtrading, Deadstock, and Bad Debts.
- Difficult to Focus on Business Development or Diversification as consumed in Accounts Receivables and Payables.
- Business and Business Owner Health will deteriorate over time.
Part 2 – Benefits of Cash Purchase vs Credit Purchase
The Simplest Advantage of purchasing in Cash is the limitation on what you buy. You will purchase only products that are essential and in limited quantity that can be covered by the cash you have on hand. Purchasing with cash also helps to curb impulse purchasing habits.
Benefits of Cash Purchase
- Suppliers will provide the Best Price(Most Economical)
- Suppliers will offer the Latest Goods ( Fast Moving )
- Suppliers will provide Preferred Buyer status in informing of the latest goods arrival.
Buying (Purchase goods that are most required and in minimum quantity as per cash available)
- No Supplier following up with us for payments
Challenges of Cash Purchase
- Limited Purchasing, which is a blessing in disguise.
- Suppliers following up for sales orders, a chance to build good relationships and get more market information
Benefits of Credit Purchase
- Free will to purchase products without any limitation to the quantity
Challenges of Credit Purchase
- Manufacturer or Suppliers create a Warehouse in your premised by Shipping Extra Goods than ordered
- Suppliers not willing to sell fast-moving goods
- Suppliers increase the prices of the products gradually
- Overtime the Supplier Payment increases to a limit, where only after payment of previous due bill will offer new goods.
- Dead Stocks keeps increasing – Not able to concentrate on Business due to constant Supplier follow-up for payments
Suppliers with the intend of locking their customers act in a very friendly manner to offer goods with extended payment terms. Over time they keep sending more goods than ordered and also a subtle increase in price and then start the emotional blackmail of how much favor they have done on us and pressure us to pay.
Part 3 – Benefits of Cash Sale vs Credit Sale
A seller who gets cash in place of a sale spontaneously, his cash circulation remains good. He never gets low on cash. He always has enough money to involve in other business transactions. A cash buying and selling business allows the owner to be free from fear of bad debts. His money is no longer stuck with debtors and he does not need to worry about how to make his debtors pay.
Benefits of Cash Sale
- Positive Cash Flow
- More Customer repeat orders (Customer, first sells goods that are purchased in cash)
- Better Price for Customer ( Passing the Cash Discount received from Supplier)
- More Time available to focus on New Business instead of following A/R
Challenges of Cash Sale
- Low Bulk Order
Benefits of Credit Sale
- Higher Sales Turnover
- Higher Profit Margin
Challenges of Credit Sale
- Goods Sold on Credit are not sold further due to Customer first selling the goods purchased in Cash
- Requires Continuous Follow-up with the customer for payment
- Payments received are Slow and not as per promised
- High risk of Bad Debts
- High Risk of goods to be returned
Customers who purchase in Cash have repeatedly stated that goods purchased from you sell amazingly fast. The fact is that our Customer would always resell our goods first as they have purchased in Cash, and that is a win-win situation for us and our customer.
This is a contributed business article.