Holding Has a Cost

HOLDING HAS A COST

Money is the blood of any business. Doing any kind of business without money is not possible, but money also has a cost attached to it. The profit is the difference between the revenue earned and various costs. In a competitive business environment, we cannot think about increasing prices to increase our profit margins. This leaves us to just the cost side. Now, cost also includes various heads, could be, production that would include all kinds of operating costs, direct and indirect costs and etc. Due to so much competition and technological advancements, it is very difficult to maintain comparative advantage here as well. So, here what I am concerned about is the cost of money (borrowed), that we usually take as interest rate.

When we talk about raising money, we always think of raising at lowest possible rates but one of the most important points to be kept in mind is the right time and the right amount. It is clearly understood as the main objective of the financing function of the financial management, but the point is how fast can you float money out of your hands. So, to control the cost of money I have two points:

1. Raise when you need: The time between the money coming to you and being invested should be as low as possible because you are paying interest rate for that time as well. The lower the time you hold, the lesser interest you pay and the lower the cost.

2. Use your supplier’s credit limit and your buyer’s credit limit: Whenever you do business, try and buy on credit and sell on cash, this allows you to have money at actually zero cost. This money can be used for the gap you have between the payment time and you can more profits. For example, you buy goods at 30 day credit and sell them for cash. This way you have extra cash coming in. Utilize this cash to again and churn the circle to earn profits.

This is very much done in big corporate houses,