Know Your Numbers – Carrying Charges
In this post we continue to look at how you, as a business leader, can achieve more when you know your numbers. (Read Part 1)
Cash Flow Management is a key factor for most businesses but often balancing the movement of funds within your business is challenging. Determining whether you should pay for products or services in one large payment or take advantage of a multi-pay option may feel like a “no-brainer” but at what cost?
What carrying charges are you incurring?
The goal of a vendor is to get you to buy their product or service. This is the same for you in your business. Many vendors offer you an opportunity to opt-in to a “multi-pay” situation rather than paying a large lump sum. In retail this may be in the form of a “buy now, pay later” scheme. Many service providers to small businesses offer you the ability to pay for a program monthly, or in 2, 3 or 4 payments. Those multi-pay options may be labelled “easy pay” or “cash flow friendly” but don’t lose sight of the fact that whenever you opt for a later payment, you will incur carrying charges.
There is no right or wrong answer unless you look at each situation individually and determine the value of the product or service, its ability to help you achieve your business goals and the impact on your cash flow. I flex between the two options, depending on circumstances, but I enter a multi-pay agreement with my eyes wide open.
Let’s look at the cost of multi-pay options.
One program I recently reviewed targeted top level leaders. This program offered a full range of training modules – both in person and virtual, tools and resources as well as some private coaching sessions. The full cost of the program was $54,000 but if you chose the monthly option, you would pay a total of $64, 850 – a full $905/month or $10,850/year more. This may feel like its an extreme example but it clearly demonstrates the impact of carrying charges. I have seen carrying charges of $1200 on a $5000 ticket item (a 24% surcharge).
If you are interested in purchasing a product or service from a vendor, such as a training program or coaching, what are the carrying costs you will incur if you do not pay at one time? If you paid at one time, what impact would that have on your cash flow – this month & for the next 3+ months? Can you pay off the balance at any time if revenues increase?Do you have other sources of money which you can use and have a lower carrying cost than the vendor is charging?