A Business Rule of Thumb: Buy On Credit, Sell For Cash
Success in business does not happen by sheer accident. It happens because the entrepreneur who owns and runs the business strives to adhere to business rules of thumb, which greatly increase the likelihood of success. One such particular rule of thumb in business is Buy on Credit, Sell for Cash.
A business needs sufficient capitalization in order to survive. This is especially true if the business is capital intensive, just like businesses that deal with merchandise and production. Businesses in the manufacturing industry, for example, will require sufficient capitalization so that it can purchase raw materials; and raw materials can sometimes be very expensive, all the more if they are sourced from outside the country.
Wise entrepreneurs know how to deal with this challenge; they apply or use the business rule of thumb Buy on Credit, Sell for Cash.
How Does this Rule of Thumb Work?
Let’s have an example of a simple business transaction between an entrepreneur who owns a manufacturing business, Mr. A, and a businessman that sells raw materials, Mr. B.
Mr. A went to see Mr. B and expresses his desire to purchase raw materials on credit. Mr. B agreed and gave Mr. A 60 days to settle his accounts payable.
The transaction is mutually beneficial: Mr. A got his raw materials on account for 60 days, and Mr. B. was able to sell his raw materials. Assuming that Mr. A will be true to his commitment and pays Mr. B on the 60th day, both of them will have made money out of the transaction, which is the very purpose why they are in business in the first place.
However, the best question to ask is this: between the two businessmen, who made the most money out of the transaction?
Following the business rule of thumb above, it would be safe to say that Mr. A got more out of the transaction than Mr. B.
Here’s what happened.
Mr. B, when the transaction was completed, will have to wait for 60 days to finally be able to say that he made a profit.
Mr. A, on the other hand, upon taking hold of the raw materials, proceeded immediately to turn the raw materials into the finished product. Let’s just say that, within 7 days, most of the raw materials have been converted into finished products. Then, the finished products left the production line and went directly to distribution. Two more days and most of these products would have reached the store shelves. These finished products are then sold for cash. Within 10 days from the moment the raw materials were bought on credit, they were turned into finished products, sold, and money came in to Mr. A. The beautiful thing about the whole transaction is that Mr. A still has 50 days or even 40, to use his earnings from the raw materials he bought on credit. He can use it to purchase more raw materials, pay his bills, or practically just add it to the cash flow of the business, until such time the 60 days accounts payable becomes due. In simple terms, he is able to use Mr. B’s money on his business within the 60 days period.
Business Rules of Thumb really works. They are business practices that are tried and tested by many successful businessmen, or more aptly, by entrepreneurs. Thus, to succeed in business, an entrepreneur can do well to learn from other successful businessmen’s experiences.
Another rule of thumb in business is to separate personal expenses from business expenses. You can do this by applying for a credit card for your business alone. Before diving into this, however, make sure you compare credit providers to get the best offers.
Responsible Usage of Business Credit Card
The popularity of credit cards has motivated people to acquire a credit card without evaluating if they really need one. Once they have a credit card, they often use it to buy things that they want. You may call this impulse buying. If you find yourself falling into a credit card trap, it’s time to reach out and ask for help.
Determine how you spend your money
You find yourself getting caught in a cycle of credit card debt. You exhaust your credit then pay only the minimum amount due by the end of the month. You should know that this is not a good practice since your account is still being charged with an interest fee. You need to evaluate your spending habits to know what credit card is right for you. People spend their money in different ways and on different things. Some cannot control the impulse to buy things they want in an instant without asking themselves of they need it. Other people plan their purchases by comparing prices before making the final decision to buy.
To avoid getting into more credit card debt, choose to keep only one credit card if you have more than one. For an impulse buyer, two or more credit cards will only bring trouble. Choosing to have one credit card will make it easier for you to pay your balance every month. Increasing your ability to pay can help you repair your credit rating. A good credit history is a valuable asset if you want to open a business or invest your funds later on.
Find the right business credit card
If you have a purchase plan for the year to buy more supplies for your business, choose a credit card with low interest rates. If you are planning to make frequent purchases in a month, a low-rate business card is ideal for your needs. It may take several months for you to repay your balance entirely but at least you will not be charged with high interest fees. When you are able, pay the full amount owed right away. In this way, you don’t have to keep on paying interest fees. You will also improve your credit score.
The right business card can also help you meet short-term goals for your business. If you are planning to replenish your supplies but you don’t have cash on hand, you can always use your credit card to pay for all those things. A business credit card will also help you separate business expenses from personal ones. You can keep track of your financial transactions for accounting and tax purposes.
The responsible use of a business credit card entails discipline and self-control. Since you are also playing the role of an entrepreneur, you should keep yourself out of debt by using your card for business only. When you can, use cash to buy personal necessities. It will help you save on interest fees. Learning what business card is right for your needs will prove to be an advantage in the long run.
When you do credit card shopping for your business credit card, make sure you look at the interest rate and the rewards that each provider offers. This is an essential step in determining which card fits the business' spending trend. To further expand the use of your card, also look into providers that offer balance transfers.