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ZERRO INTEREST BUSINESS LOAN

Whynot

SGF, Supreme Grumble Framer
Wonder if any grumbler had ever minded and calculated the annual net profit he's pocketing from the cumulated effect of free loans obtained from clients (full or just down payments) and suppliers (30 days credit, late payments)?
I don't mean the moral aspect of it or getting any technical justifications, but figures, because framers tend to be very concerned with numbers reflecting on their exact prices, COG, scrap values and brut-net-marginal profits, while totally ignoring this aspect that may amount for a considerable percent of their annual profit. Very interesting how all the books, classes and chapters out there have all avoided discussing this obvious source of profit, isn't it?
 
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Bob Carter

SPFG, Supreme Picture Framing God
Hey Cornel-Not sure it's calculateable (is that a word?); especially as most probably don't generate any revenue over the float of bank funds

But, surely, any "profits" would eaily be eroded by that workorder that goes un-picked up for months

At lest, for us, anyway
 

DTWDSM

SGF, Supreme Grumble Framer
Cornell,

For the exact reason that Bob mentioned (sitting orders) I really do not think that any framer is making any money off of any vendor.

Now we do make money by taking quick pay discounts. Now I know that you may say that vendors actually make less money by offering them but if you consider the fact that I may pay a vendor in 10-20 days instead of 30-45, then the vendor is making money by having it in their bank account earning interest before I get my customer to pay me for it, I guess we both come out ahead don't we?
 

EllenAtHowards

PFG, Picture Framing God
Roger keeps track of those early pay discounts, and you talk about free money! That adds up to a HUGE sum at the end of the year, all of which goes to our bottom line. As long as the companies offer them, we will take them. And pay by airline miles credit card, too, if we can...

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David N Waldmann

SGF, Supreme Grumble Framer
From the vendor side, I consider the 2% prompt pay discount a cost of doing business. I certainly don't make 2% on the money in the extra 20 days I have it in the bank - that would require an interest rate of over 36% per year. Of course, 2% is less than the 2.5% it costs me to take a credit card, but with a credit card I have the money in 1-2 days instead of 8-12.

From the customer side, we take the 2% discount whenever offered. Even if I have to borrow the money to pay in 10 instead of 30, I've never yet had to borrow it from someone who charges 36%...

All these considerations assume that one actually does pay in 30 days without the discount, but the advantage is definitely to the one who is the customer.
 

wpfay

Angry Badger
Roger keeps track of those early pay discounts, and you talk about free money! That adds up to a HUGE sum at the end of the year, all of which goes to our bottom line. As long as the companies offer them, we will take them. And pay by airline miles credit card, too, if we can...

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Not one of the vendors I deal with will will honor both the prompt pay discount and accept payment on a credit card. It's one or the other. I have asked, perhaps I should ask again.

The "Net 30" aspect does mean that you can otherwise either draw interest on your money for an additional 30 days, or avoid having to borrow to pay an invoice, but it has always been thus. It is a constant so it really doesn't change anything. The prompt pay is a variable (LJ offers 5% on orders over $X) and can have a fairly dynamic effect. The other end of the stick is COD, where you are forced to pay as you play and there is a penalty (COD Charge from UPS, etc...) for using COD.

I guess the question is better couched in a "as compared to what" scenario. Yes, net 30 provides marginal interest income in comparison to COD or Pro Forma payments. At todays rates about .4-.6% (5-7%apy) in real time.
 

Dave

SPFG, Supreme Picture Framing God
When my business was larger I had a Merrill Lynch money management account with a debit card and no fees whatsoever. The debit card purchases were only deducted once a month on the 25th of the month. Any purchases made had to be covered by funds in the account however those reserved funds earned a money market rate of interest until deducted on the 25th

In addition all purchases with the card earned miles and I was earning about 250,000 miles per year.

Many vendors were willing to put my purchases on net 30, 60 or 90 day terms and automatically charge those purchases to the card on the first of each month after the due date of the invoice.

This allowed me to:

a.) not have to write any checks to these vendors.

b.) not have any fees

c.) earn interest on funds already spent for at least 25 days.

d.) Have effective net terms of at least 55 days if I gaged my purchases to be made right after the 25th of the month.

e.) not have to pay for any airline travel for over ten years.

In addition, if I ever had an overdraft, they would give me a courtesy call and I had 48 hours to cover the overdraft with no associated fees.

It was a helluva deal.
 

Whynot

SGF, Supreme Grumble Framer
We tend to be always concerned just with our end of the stick, which in my case is not the same with yours, and I know for a fact that from my day one in this business I took no down payments on my clients' orders and had to finance from my own pocket all materials, labor, intl. and domestic transportation, customs, broker's fees, packing and UPS charges till my frames will make it to you [framers], my clients. The next cycle (till my money kicks in) must be equally financed and all bills and dues must be paid in time.

Now, let's make it simple and say that all the orders come in by the first of each month, all are being delivered by the first of next month, credit cards have not yet been invented, and all my clients pay by the end of 30 days grace period, it appears that
1/ I have to come up with money for 2 production cycles and that money may carry interest unless I steal it
2/ My entire gross was being kept and used for one month (after each delivery) by my clients, who in fact had borrowed that money from me, for free, since my frames have already been paid in full or in part by their final buyers when they placed their orders.

Every single supplier is financing framers business this way. Every single framer uses the down payment for free for two months, and the balance for another month. It isn't your supplier's business to wait till your client picks the frame and pay the balance. You can't export that risk which was partially if not fully covered when getting paid at the time the order was placed.

Now if that is not free money, then what is it?
 

wpfay

Angry Badger
Now if that is not free money, then what is it?
Part of your cost of doing business.

I know it is usual and customary for suppliers to extend terms to retailers so you may not have any real choice in the matter. You seem to have a very good understanding of what it costs you to provide those terms so I would also figure that you have incorporated it into the price of your product. So the framer is in fact paying for the money that you have to borrow (or not earn interest on). If not, it certainly isn't our fault that you don't figure that cost into your pricing. If you are trying to make us feel guilty about your financial obligations in running your business, I think you are barking up the wrong tree. Your argument holds about as much water as the concept of "free" delivery or (watch me duck) corner samples.

I do agree that the framer's obligation to you in no way is connected to their customers obligation to them. Businesses that consistently use this kind of logic usually end up in the penalty box having to pay COD for all or some goods.
 

Whynot

SGF, Supreme Grumble Framer
Wally,

I disagree with you on this. I provide a custom service to you the same way you provide a custom service to your costumer, and same reasons you have to get a down payment are valid in my case too. More over, the down payment that you received for the frame that you ordered with me is directly related to that job, it validates it, being sufficient to fully cover for it and all its accessories. The down payment covers for your cost, not for your profit first.
There is no reason a supplier must finance your business for 30+ days when you already received that supplier's full price worth in deposits? See? That's not fair. And you call this supplier’s "cost of doing business"? By what text book is that? In real life there are numerous reasons for which I may accept this rule or even invite it, but that doesn't make it fairer or into an economic law.
In fact I tell you a secret: the fact that not every business is taking vacation from the Contractual Discipline is the only reason the economy is still working. Some years ago I was witnessing Romanian economy almost arriving to a stop because everybody was owing to everybody due to this "crediting" rule being generalized and abused. Is this a sign of economic power or economic weakness? That's what I wanted to stress in here. If framers were obliged to pay a deposit and the balance on delivery, they would probably accuse a low blow, right?

Why aren't you holding yourself to the same standards you preach on me (your suppliers)?
Would you survive in this business without deposits and 30 days credit extended to your costumers?
How much higher your prices need be to cushion for such a "cost of doing business"?

I am not trying to get you be compassionate to your suppliers, but contemplate this case from an objective point of view and, perhaps, realize that in this very specific case framers are not playing hard ball while expecting others to.
 

wpfay

Angry Badger
I understand the academic argument, Cornel. You have very valid points. Why don't you start requiring 50% deposits on all orders?

It's the game we play...like it or not, fair or not. You know the rules going in to the deal, and you either play or burn. I will say that we don't have many alternatives in your case, but in most of the business there are a lot of interchangeable vendors, and those will compete against one another using whatever tools they have at their disposal.
Philosophically you are right, but the reality is considerably different.

You have, in this industry, what I consider to be a unique product. Why do you have to play by the same rules that govern business in this industry where there is a certain lack of originality (I was gong to say "uniqueness" but I really hate that word)? Are all vendors created equal?

Back to reality...Would you ever consider asking for payment in advance of an order being processed? Conversely...would I ever consider paying for an order in advance?

Consider this in you "terms":
Because of the unique (OK choose your own phrase) nature of our product, we require payment in full at the time of order.

How would that effect your bottom line?
 

Whynot

SGF, Supreme Grumble Framer
I understand the academic argument, Cornel. You have very valid points. Why don't you start requiring 50% deposits on all orders??

As a matter of fact, Wally, I've asked on occasions and always have been paid. It is my understanding that Munn used to (oh yeah, Pat, that isn't your game with Max :)) and APF is still asking for a deposits, and balance in full on delivery, until credit is established.
If I take deposits or not is marginal here, if not completely other topic. What I wanted to underline is that, "academically" speaking, framers expect/ask/make their suppliers support them in more than one single way, one of which, perhaps the most precious of them all, is going largely unnoticed; that is using their suppliers' money for free. That amounts to some profit figure during a fiscal year, profit to which framers look as if theirs legitimately earned (or wasted).
How much that is? Bob Carter is able to measure it within four decimal precision range.
 

Pat Murphey

SPFG, Supreme Picture Framing God
A wholesale supplier - even one like Cornel's - should have very few problems with a retail store, with established credit, welshing on an order that has been "custom" cut and/or manufactured. Ergo, no particular need for a deposit. The situation is entirely different with a retail customer who has come in off the street. Regardless which model is applied, it is nonsense to believe that anyone running a business has not priced his product to compensate for a delay in payment. If not, shame on him - not his customers.
 

wpfay

Angry Badger
Cornel, All the terms of the business agreement are interrelated...you can't just randomly pick out one aspect and analyse it without context and, as with most things, that context is negotiable. I'm with Pat...if you're not calculating the cost of money into your business, it is neither my fault, nor my problem. Trying to place the onus upon the framer with your suggestion of free money is in my view misguided.
The consumer can't make the producer do anything without the producers implied consent. Yes, suppliers offer support to the consumer in various ways, but it is all factored in to the bottom line. If the suppliers suffer from this relationship it is much their own doing.
 

Whynot

SGF, Supreme Grumble Framer
This is exactly what I did not want to infer. It isn't about me or my clients because I happen to function in a wonderful niche. No supplier can hope for better clients that those I have. Twenty plus thousand dollars orders are being phoned, produced and delivered on trust and paid as agreed. But not all framers are alike because the people one does business with are having a formating role on him and his business manners.

I am price conscientious just like every other manufacturer/supplier is. It's hard enough to come up with a correct price for a certain type new molding, or periodically update prices with the real cost of gold leaf (which is rapidly and constantly growing at a pace than can't be guessed but by largest stock market players), leave alone factor in there such esoteric business expense as corner samples, 30 days credit, late payments, bounced checks etc.

Exact pricing is a nightmare task for [small] manufacturers and just neat formulas for everybody else helping to sell that product. Framers are living in routine price area and are notoriously in need for Bob Carter's business advice and teachings. Therefore I doubt that framers factored into their prices yje costs with late payments, bounced checks or inflation, in one hand, or ever considered the benefit of using other people's money, on the other hand. The way framers are not aware of the upper ground they enjoy without "academic business" justification, when allowed to use money without a cost to them, their suppliers, which are not bankers, are not aware Omuch less mastering) the credits that they give to their clients.
Bankers have invented this selling tool named credit (and they perceive a hefty price for their product), the rest of us just blindly mimic those techniques [for free], much the same way we mimic successful ad campaigns that were masterfully and expensively crafted for other industries than ours and hope they’ll work marvels and chase away BB’s.
 
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